Good governance must complement fiscal management
Union Finance Minister Nirmala Sitharaman didn’t make a political point when she said that India has fiscal space to support sectors impacted by the escalating West Asia crisis. It is because of the deft management of public finance over the years, which has resulted in a steady decline in fiscal and revenue deficits, despite heavy capital expenditure. External headwinds are strong and unrelenting. As she said, “The escalation of Middle East conflict has evolved from a regional security concern into a systemic tremor threatening vital arteries of global energy and hardening the lines of [a] new multipolar world order.”
Sound public finance management, however, provides considerable resilience, giving the Finance Minister elbow room to help the badly hit sectors. The “systemic tremor” has already started hurting India. Moody’s Ratings has cut economic growth projections for 2026-27 from 6.8 per cent to six per cent. The credit ratings agency has attributed the cut to the ongoing war in West Asia and its impact on the global energy market. Other challenges India’s economy faces are well-known: “subdued private consumption, softer industrial activity and a weakening in the momentum of gross fixed capital formation amid elevated prices and higher input costs.”
The baneful impact of the Iran war is also reflected in India’s services sector, whose growth was at its weakest pace in 14 months in March. The government can learn two lessons from the current situation. First, reducing dependence on petroleum imports is not optional but mandatory. To mitigate this, the government must accelerate investments in both fossil fuels and alternative energy sources like renewables, expand domestic exploration and production, and promote energy efficiency across sectors. Initiatives like electric mobility, green hydrogen, and solar energy must be scaled up not just as climate commitments but as economic imperatives.
Diversifying energy sources and suppliers can also help reduce risk. The second lesson is equally important: sound fiscal management must go hand in hand with efficient governance and service delivery. Having fiscal space is valuable, but its effectiveness depends on how well it is utilised. The recent panic and disruptions caused by LPG shortages illustrate this point vividly. While global supply constraints may have been unavoidable, the scale of the domestic disruption points to gaps in planning, logistics, and coordination. Better forecast of demand, maintaining adequate buffer stocks, and ensuring smoother distribution mechanisms could have significantly reduced the intensity of the crisis.
Such episodes highlight that macroeconomic stability alone is not sufficient. Micro-level efficiency in implementation is crucial to ensure that policy intentions translate into tangible outcomes for citizens and businesses. In times of crisis, the ability of the government to respond swiftly and effectively can make a substantial difference in mitigating economic and social impact. Furthermore, transparent communication and timely intervention are essential to prevent panic. When shortages or disruptions occur, clear messaging and visible action from authorities can help maintain public confidence.
Strengthening institutional capacity and leveraging technology for supply chain management can also enhance responsiveness. The current global environment, marked by geopolitical tensions and economic uncertainty, demands a dual approach: reducing external vulnerabilities—especially in energy—and improving domestic governance. By learning from recent challenges and acting decisively, the government can not only navigate the present crisis but also build a more resilient and self-reliant economy for the future.
