Insights from behavioural economics suggest that an ambitious nudge can be effective if three conditions are met
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Illustration: Binay Sinha
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The Prime Minister has urged citizens to conserve both energy and foreign exchange. At its core, this appeal seeks to nudge Indians towards behavioural changes that reduce consumption of imported commodities such as crude oil and gold, as well as non-essential imports and foreign travel.
Insights from behavioural economics suggest that an ambitious nudge can be effective if three conditions are met. First, it must establish a clear focal point which, in this case, is import dependence and foreign exchange reserves. Second, the intended behavioural change must be perceived as socially desirable (in this case, national interest). Third, and most critically, the change must be incentive-compatible—meaning individuals should find it in their interest to adopt the suggested behaviour. While the first two elements define the direction of the intended change, the magnitude and sustainability of the impact depend on the presence of appropriate incentives typically arising from price and non-price policy measures.
By this yardstick, the increase in retail prices of petrol, diesel, and compressed natural gas or CNG (₹2-3 per litre) is far below what is needed for a material decrease in demand and war-inflated crude oil bill. Several surveys suggest that people expect further increase in prices.
Indeed, a multi-step increase in petrol, diesel, gas and fertiliser prices will act as a force multiplier for the PM’s nudge.
For one, it will help ease pressure on the rupee and the current account deficit (CAD) — a measure of the shortfall between total earnings from exports and money spent on imports. The crude oil spike is the main reason for the recent depreciation in the rupee and the widening CAD. The Brent crude and dollar-rupee exchange rates have moved together over the last two months. Global inventories of crude and its by-products are falling fast, so commodity prices are expected to remain elevated for much of 2026.
At home, reserves are 15 per cent down as average daily imports are falling short of the requirement by half-a-million barrels. So, the pressure on the rupee exchange rate will persist unless we narrow the CAD.
An additional fuel price rise is needed to reduce oil demand and hence the CAD, which is expected to cross 2 per cent of GDP during this fiscal. Besides, it will nudge households and businesses to use better and indigenous alternatives such as electricity, whose share in the energy basket is about 20 per cent, much lower than China’s 28 per cent. An increase in urea prices, matched by compensatory direct benefit transfers to farmers, will improve the nutrient mix for agriculture.
Price and non-price measures
So far, the centre and oil marketing companies (OMCs) have borne entire costs of war-surged crude oil imports. India stands out in fully shielding its population from the impact of the crisis. Several countries, even those with much higher oil reserves and lower oil intensity — including China and Japan — have passed some of the burden on to their citizens. The post-war headline inflation increase is lower in India than in the US and several European Union (EU) nations. Keeping retail oil prices in check was a prudent policy, as it helped contain the direct impacts of crisis-inflated crude oil prices on citizenry.
Having moderated the initial inflationary impact, it is now time to focus on limiting the fiscal and quasi-fiscal costs of the West Asia crisis. Revenue loss on account of the reduction in special excise duty on petrol and diesel is estimated at ₹1.3trillion-1.5 trillion annually. Reports suggest that OMCs are facing a negative marketing margin of ₹17-18 per litre on petrol and diesel, even after Thursday’s price increase. The fertiliser subsidy is likely to increase by 20 per cent due to higher input prices.
It is important to maintain fiscal prudence —one of the most closely watched fundamentals that played an important role in India’s rating upgrades and inclusion on global bond indices in recent years. Fiscal indicators are under stress now.
The non-price measures are equally important. We have signed free trade agreements (FTAs) with 37 countries, but have yet to work out the details, a prerequisite for reaping the benefits of these deals. As trade and investment go hand in hand, we can expect these agreements to boost foreign direct investment (FDI), but only after detailed trade and investment frameworks are in place.
The US tariffs and West Asia crisis provide a helpful background for expediting the process, as most countries want to diversify their trade partners and value chains. It will help if Indian corporates respond to the PM’s appeal by limiting non-strategic outward FDI.
Lending gold
The huge gold holdings of non-household entities, such as religious trusts and market institutions, should be put to productive use. The exact quantum of gold holdings by trusts is a matter of guesswork. Even if we consider just the institutional bullion holdings — exchange traded funds, electronic gold receipts (EGRs) and digital gold apps — they are approximately 150-170 tonnes. By contrast, only 85-110 tonnes of gold imported annually are consumed by exporters to manufacture items for foreign markets.
Sovereign-backed Gold Metal Loans (S-GML) can be designed to provide short-term gold loans to gems and jewellery exporters. This will reduce gold imports in the short run and improve the utilisation of precious metals in the medium and long term, boosting the competitiveness of jewellery exports. Unlike the traditional Gold Monetisation Scheme (GMS), which suffered from high melting costs, emotional resistance, and severe sovereign price liabilities, the proposed S-GML utilises existing, pre-certified vault assets.
Unlike the sovereign gold bond scheme that turned out to be a huge fiscal burden, S-GML entails only limited government liability. Banks could borrow the gold assets underlying ETFs and EGRs directly from empanelled vault managers and lend them onward to Sebi/RBI KYC-compliant jewellery exporters. Details can be worked to limit the fiscal cost of the sovereign backing needed to mitigate the underlying risks.
Complemented with the above measures, the PM’s appeal can translate into measurable reductions in import dependence. Such a strategy would not only conserve foreign exchange but also enhance macroeconomic stability in an increasingly uncertain global environment.
The writer is director, Delhi School of Economics and member, Monetary Policy Committee of the RBI
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