Opinion | PM Modi's Austerity Appeal And The Bitter Economics Of 'Sacrifice'

The term 'austerity' has a brutal etymology. The Greek root, austeros, did not begin life as a word for budgets or state discipline; it described a harsh, drying, astringent sensation on the tongue, the bitterness left by unripe fruit or rough wine. In modern terms, the closest equivalent might be "yuck." That the word should travel through Latin and Old French to dominate the modern vocabulary of crisis governance illuminates how governments have worked to find a word that shields them and leaves the people with the bitter dose.

The deepest roots of austerity are not fiscal but spiritual - it's a thought that ran parallel to penance in sermons by those quoting scriptures. Austerity draws strength from religious beliefs - how Islam honours Zuhd and encourages Wasaf, the Jews know of the era of the Tzena. Christian monasticism valorises renunciation, whereas in Hinduism, tapas burns impurity with the inner fire of self-discipline, of denial.

Not A Pretty Picture

Earlier this month, Prime Minister Narendra Modi stepped into this hazy world of faith and fiscal foment with his own version of passive austerity, asking folks not to buy gold, eschew foreign travel, and adopt work from home and virtual learning. The key driver, of course, is the state of the rupee, now careening past Rs 96 per dollar, pushing India from fourth-largest to sixth-largest and knocking at the next rung. All this as Brent yo-yos around $110/barrel. As higher costs are estimated to add over $90 billion, the economy finds itself over a barrel.

The costs of war and an eroding currency are showing up. The April GST collections, for instance, hit a record Rs 2.43 lakh crore. But it was a record the government could not celebrate. The composition spelt out a troubling story. Domestic sales GST (that is, levies collected from local sales) grew only 4.3%, while import-related GST sales grew by 25.8%. The rupee is the cause and consequence of its state - every fall in its value triggers outflows, which worsen its slide. Data is mocking those who argue that a weaker rupee helps exports and draws investment.

The costs and the pain are not just in the spreadsheets. It is a double and triple whammy. The molecular contagion has left thousands of units without gas to fuel their production - from ceramic kilns of Morbi to textile hubs of Panipat-Sonipat, footwear units are facing an existential challenge. India is a far bigger and far more complex economy than it was in the 1990s. It is far more integrated in the global economy of goods and services than ever before. It is estimated that nearly 30% of India's exports depend on imported intermediates. The top five exports - refined petroleum, electrical and electronic equipment, machinery, jewellery and pharmaceuticals - all require imported ingredients.

But It's Not Policy - Yet

A plea is not a policy. PM Modi's plea is more a sermon on austerity, and a sermon is not a policy - not yet. Now you could argue that the appeal for austerity stems from the fears that things may get worse in West Asia. You could also argue that the Prime Minister is pushing his Atmanirbhar Bharat campaign. It could be this or that or both and more. Fact is, PM Modi prides himself on his fluency with the masses and is not merely asking them to consume less but also seeking their participation in the defence of the national currency, and this is a call to dollar austerity.

The appeal encounters social and economic realities. Take the plea not to buy gold. The yellow metal is not what the chatterati class of analysts see it as. Gold is an investment, a hedge, a liquid pool of cash and an instrument of crisis management in an economy where access to credit still requires businesses to jump through hoops. It is not surprising, therefore, that gold mortgage companies have extended over Rs 15 lakh crore in loans. The gold economy supports thousands of artisans and small enterprises. It is estimated that there are between 8 and 10 million marriages in India. Families bequeath gold as an instrument of wealth transfer, as seed capital for a new home or business, as a tranche for future requirements and more.

India's history with austerity sharpens the perspective considerably. The most instructive chapter remains 1991, when India had to pledge gold and went to the IMF for a bailout. The subsidy cuts, the tax hikes, the devaluation, shrunk demand, but the transformative moves of dismantling the Licence Raj created room for growth. The 2016 demonetisation was forced austerity which whittled economic activity as jobs were lost and GDP decelerated. The heat of tapas worked politically but burnt consumption and growth in the economy.

Austerity And Economy - In Real Time

The fundamental question is how the appeal affects the economy. The economy is like a watch: many small and large wheels interlock, driven by the mainspring, regulated by the gear train and escapement, and paced by the balance wheel. The hands - hour, minute, and second - move only because every part turns in rhythm. The real question is whether the watch can still keep time if one or two of its components are stopped or slowed. The fact is, just as private investment has direct and indirect benefits, consumption cuts have direct and indirect consequences.

The growth question is where austerity's internal contradictions become most brutal. The theoretical promise is straightforward: fiscal discipline restores market confidence, sovereign borrowing costs fall, private investment rushes in to fill the gap left by retreating government spending, and growth resumes. Reality proves to be less cooperative. And the Greeks know a thing about austeros and bad taste. In 2010, Athens was turned into a lab for austerity. The tidy logic was that Greece lived beyond its means and needed discipline for recovery. What followed was a decade of devastation - GDP contracted, hospitals ran out of medicines

Mark Blyth, in 'Austerity - A history of a dangerous idea', reviewed its history to conclude, "Austerity doesn't work. Period." As Keynes explains through the concept of the fiscal multiplier, cutting during a downturn does not merely reduce the deficit - it reduces the economy from which the deficit must be repaid. The denominator shrinks along with the numerator. Nobel Laureate Joseph Stiglitz's chant has been "Austerity has never worked. It is a failure in theory and in practice."

A Plea For A Few?

It has been argued that PM Modi's plea is for dollar austerity targets a narrow cohort of affluent urban households whose consumption patterns account for a share of the current account or dollar leakage. Given his reach among affluent groups, it is possible there could be a behavioural shift - and these will show up, say, in the quarterly numbers of big tag players like Titan or carriers like Indigo and tourism adjacent hospitality players. Private consumption accounts for nearly 60% of India's GDP. The concern is not direct dollar austerity but the second-order impact on sentiments, which could translate into a drag on headline GDP, corporate revenues and ultimately tax receipts critical to keep the fundamentals in equilibrium.

In the fiscal politics of economics in the past 100 years, austerity dropped anchor at different times in different conditions - "its imposition in Germany after World War I, according to economist Clara Mattei, paved the way for fascism in Europe". The experiments with austerity in France between 1932 and 1936 crippled the economy and were halted following public riots in January 1936. The Cripps Austerity in 1947 in the UK, imposed by Chancellor Stafford Cripps, reduced the word austerity to a slur. The 2010 version of austerity in the UK didn't fare any better. Canada's 1994 exercise, which succeeded because the US boom absorbed Canadian output, is effectively the exception proving the rule.

The fact is that India's dollar gap has been visible well before the West Asia conflict - it is born out of a fall in net FDI, the relative underperformance of Indian corporates, the lure of alternate returns. That FIIs sold over Rs 1.6 lakh crore in 2025 and over Rs 2.1 lakh crore year to date spells the structural faultlines of the economy's competitiveness. The question is not whether India needs to protect the currency but how it must go about it. India's demography and its deficits demand that India seek out-of-the-box avenues - dollarising public assets, for instance - to address investment and resource deficit to boost growth in uncertain times.  

As for austerity, as John Maynard Keynes observed, "The boom, not the slump, is the right time for austerity at the Treasury."

(Shankkar Aiyar is a political economy analyst and author)

Disclaimer: These are the personal opinions of the author