The Russian-Ukrainian conflict will have little impact on the Indian economy

Geopolitical tensions resulting from the ongoing Russian-Ukrainian war are likely to have only a small impact on the Indian economy, through an increase in global oil prices.

Russia launched a full-fledged invasion of Ukraine that began on February 24 and entered day five on Monday, with fighting continuing in many Ukrainian territories. On Sunday, Russian President Vladimir Putin instructed his nuclear personnel to prepare, leaving little to no room for negotiations.

In regards to alleged Russian aggression, the United States and its Western allies have imposed economic, diplomatic and travel restrictions on Russian individuals, businesses and the government that Western leaders, including the President American Joe Biden, would have a massive impact on the Russian economy. While these Western economic powers have indicated that new sanctions will be imposed on Russia, in case the current war is prolonged further.

“Russia is not a major trading partner for India. In FY21, India’s exports to Russia were only recorded at US$2.7 billion, or 0.9% of India’s total exports. These are mainly pharmaceuticals and electrical machinery. India’s imports from Russia amounted to US$5.5 billion, or 1.4% of total imports. Petroleum products make up half of India’s imports from Russia and can easily be substituted by other markets. Therefore, the impact on India’s bilateral trade with Russia is not expected to be significant,” said Madan Sabnavis, Chief Economist, Bank of Baroda.

The indirect economic impact of the Russian-Ukrainian crisis should only be felt through higher oil prices. Since India is a large consumer of oil, much of which is imported, the impact of rising oil prices can be seen not only on the trade deficit and the currency, but also on inflation and the budgetary situation.

It should be noted that the Union budget and the RBI monetary policy announcement came well before the outbreak of this crisis and therefore did not take into account the impact of the shock of the crude price. Both the budget and the RBI therefore took a conservative estimate of crude prices around US$75 per barrel (bbl), which is likely to be a challenge going forward.

“Macroeconomic implications of the geopolitical crisis will stem primarily from soaring crude oil prices, as Russia does not have a large share in India’s trade basket. Although the Indian Rupee (INR) has been relatively constrained in 2022 so far, despite high crude oil prices, pessimistic global sentiments as well as a stronger US Dollar could weaken the Indian Rupee going forward. On the positive side, India’s large foreign exchange reserves and a current account deficit that is expected to remain below 3% of gross domestic product (GDP) even if crude averages US$100 a barrel during in fiscal year 2023, should avoid a depreciation in the INR beyond 78 against the greenback in the first half of 2022,” said Aditi Nayar, Chief Economist, Aditi Nayar, Chief Economist, ICRA Ltd.

Interestingly, India signed a long-term treaty with Russia to trade the Indian Rupee. Therefore, any weakness in the Indian Rupee will also have a marginal impact on bilateral trade.

A sharp rise in crude oil prices seen with the benchmark Brent hit the US$105 level in intraday trade last week, but ended in a profit at US$97.92 a barrel on Friday. Similarly, Western Texas Intermediate (WTI) also saw high volatility before settling at US$91.59 a barrel on Friday.

India imports more than 80% of its total oil needs and is the world’s third largest importer of crude oil. In fiscal year 2021, India’s oil imports totaled US$82.7 billion. For the period between April 2021 and January 2022, India’s oil imports rose sharply to US$125.5 billion, partly driven by the economic recovery as well as higher oil prices. However, with oil prices now hovering at their highest level in eight years, India’s oil imports are expected to be higher in value terms. In FY 2022, India’s crude oil imports are estimated at US$155.5 billion.

Crude oil-related products weigh 7.3% in the WPI basket. Thus, the direct impact of a 10% increase in oil prices is estimated at around 0.7% on the wholesale price index (WPI). Adding the indirect impact, the overall effect can be around a 1% increase in WPI inflation.

In contrast, the impact on inflation of the consumer price index (CPI) will be both direct and indirect. Gasoline and related products have a weight of 2.4% in the CPI basket. However, retail petrol and diesel prices at the pump also include excise duties, value added tax (VAT), etc., which will remain unchanged. Even if the base gasoline/diesel rate increases by 5%, the real impact on retail prices is estimated to be around 5%.

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