A prolonged Ukraine conflict to hit India hard

Story by  Sushma Ramachandran | Posted by  Aasha Khosa • 2 Years ago
After dealing with humanitarian crisis of evacuation of 20,000 students from Ukraine India has to deal with economic fallout of the conflict
After dealing with humanitarian crisis of evacuation of 20,000 students from Ukraine India has to deal with economic fallout of the conflict

 

 Sushma Ramachandran
 


The Ukraine crisis is worsening and the impact on the world economy is intensifying. Global crude oil prices have shot up to 130 dollars per barrel and may go up even further. The financial sanctions on Russia by western countries have come into effect and these have been accompanied by the flight of multinationals from that country. The latest salvo has been the U.S. move to ban the import of oil and gas from that country. What is even more worrying is the prospect of a stoppage of Russian oil and gas supplies to European countries as this will create serious hardship for a region that gets 40 percent of its energy supplies from this source. It will also push oil prices further northwards. And this in turn will create economic distress not just in the developed world but also in emerging economies like India.

India is already grappling with the fall-out of the Ukraine crisis. The rising crude oil prices have spooked stock markets which are showing extreme volatility. What is worse is the rupee has depreciated sharply in response to the expectation that the soaring international prices will push up the country’s import bill. While stock markets are likely to recover given the long-term assessment that India will continue to be on a higher growth path than most other countries, the sharp dip in the rupee is a worrying phenomenon. But it must be recalled that the rupee has fallen even more sharply in the past as in 2013 when it dipped by as much s 13 percent. It is also likely the central bank will intervene to ensure the rupee’s stability hence this could be a temporary phenomenon. 

From the point of view of exporters, however, rupee depreciation is welcome. It will give a boost to exports which have been more buoyant than in many years, during the current fiscal. On the other hand, a depreciated rupee will raise import costs at a time when the exchequer will have to shell out more foreign exchange just to buy crude oil. Even so, there is no immediate need to be concerned about the oil import bill given the fact that foreign exchange reserves have been burgeoning over the past two years. Currently, India holds about 635 billion dollars of such reserves, the third-highest in the world. While it would not be advisable to have these depleted simply to pay for costlier oil imports, it does mean there is no resource crisis in the short run. The import bill for crude oil purchases which meet over 80 percent of the country’s needs had fallen drastically to about 62.2 billion dollars in 2020-21 owing to the sharp dip in world prices during the initial phase of the Covid pandemic. But with prices having hardened over the past 8 or 9 months, oil imports are expected to cost around 110 billion dollars in 2021-22.

The other issue flagged by Finance Minister Nirmala Sitharaman in some recent comments was the possibility of seeking alternative sources for oil purchases. This assumes significance in the light of reports that Russia is offering to sell oil to this country at a heavy discount. Agreeing to such a deal could have mutual benefits as India needs to urgently source cheaper oil which is not available anywhere else in the world, while Russia is looking for new buyers. European countries have so far exempted oil and gas supplies from sanctions, clearly given the hardships that these could impose on consumers. There is concern that Russia could take the first step by closing the tap on oil and gas pipeline supplies. In such a situation,

India too needs to make decisions based on its self-interest, just as European countries have done by imposing sanctions selectively. Media reports indicate that some bankers are concerned that buying Russian oil could annoy western nations, but it must be recognized that even they are imposing sanctions that will avoid impacting their economies.

The U.S., for instance, is itself a major oil producer and exporter largely as a result of rising shale oil output. It, therefore, has few concerns about cutting imports from Russia. To offset the supplies from there, it is even reported to be considered importing from Venezuela, a country against which sanctions had been imposed earlier by the U.S.

The entire oil issue is sparking fears here that raising petroleum product prices could aggravate inflationary pressures on the economy. Inflation is already at six percent, the upper end of the band that the Reserve Bank of India has fixed as the acceptable range. In case prices of petrol and diesel are raised, the cascading effect will lead to an all-round rise in prices throughout the economy. For the time being, there is a pause in the regular price revisions by the oil marketing companies.

Though the public sector OMCs normally revise prices every fortnight based on international prices, this process came to a halt as soon as campaigning began for elections. At the time, world prices were much lower, around 82 to 83 dollars per barrel. The government would be wise to moderate any price increases for the time being to avoid pushing inflation as well as to ease the burden on the general public. One of the ways to do so would be to cut back on the currently high excise levies on petroleum products. With direct and indirect revenues have been buoyant in the current fiscal, it should be possible to take this approach rather than going for sharp price hikes.

At the same time, policy options to contain the impact of the Ukraine crisis can only be limited in nature for the time being. Much will depend on the external environment which is largely out of this country’s control. The only path forward is to take recourse to diplomatic initiatives as are being done already by Prime Minister Narendra Modi who has been speaking regularly to both the Russian and Ukrainian Presidents. In case the conflict stretches longer, it may set off economic distress in many countries, especially emerging economies.