Ukraine Crisis and Economy

INTERNATIONAL/ ECONOMY

• GS-2: Effect of policies and politics of developed and developing countries on India’s interests.

Ukraine Crisis and Economy

Context: The combative advent of the Russian military into Ukraine has predictably spooked markets across all asset classes the world over. 

• Oil prices surged to an eight-year high of around $105 a barrel
• Indian Stock markets crashing nearly 5% 
• Indian rupee dipped close to the 76 to a dollar mark.

Impact on the trade

• India’s imports of petroleum products from Russia are only a fraction of its total oil import bill and thus, replaceable. But getting alternative sources for fertilizers and sunflower oil may not be as easy. 
• Exports to Russia account for less than 1% of India’s total exports; pharmaceuticals and tea could face some challenges, as will shipments to CIS countries. 
• Freight rate hikes (due to increased risk in global trade) could make overall exports less competitive too, but it is the indirect impact on the trade account that is more worrying.
• The surge in crude oil prices will increase India’s inelastic oil import bill, and gold imports could increase and keep the rupee under pressure. As a result, trade and current account deficits may be jeopardised, although forex reserves are healthy.
  • India imports more than 80% of its oil requirement, but the share of oil imports in its total imports is around 25%

Impact on domestic Inflation

• Brent crude shot past the $100 per barrel mark for the first time in eight years on concerns over supply. Russia is the world’s second largest oil producer.
• Rising oil prices could speed up already rising inflation. Oil-related products have a share of over 9% in the WPI basket. It is estimated that a 10% increase in crude would lead to an increase of around 0.9% in WPI inflation. 
• Also, sanctions on Russia by the West could impact its trade with the world — and result in a rise in the prices of other commodities and products, including wheat, edible oil, and metals. This in turn is going to add to the domestic inflation.
• The RBI’s assertion that retail inflation had peaked at 6.01% in January, as well as its growth-accommodative stance may need a rethink with oil prices 11% higher since its February 10 monetary policy review.

Impact on Economic Recovery

• A larger oil import bill will impact India’s external position and its overall macro-economic stability.
• Rising Oil Prices it is also likely to increase subsidies on LPG and kerosene, pushing up the overall subsidy bill.
• Foreign portfolio investors have been selling their holdings in Indian equities over the last four months after the US Federal Reserve announced an increase in the pace of withdrawal of stimulus.
  • Investors started pulling out funds from emerging economies to park them in US treasuries and benefit from the expected rise in bond yields.
• Out of the total FPI pullout of Rs 82,745 crore beginning November 2021, Rs 57,774 crore was withdrawn between January and February 2022. This outflow is likely to continue over the coming days. 

Good Outlook

• Even as FPIs pulled out money, domestic institutions emerged as net investors.
• With the fundamentals strong and concerns restricted mostly to external factors, experts say the markets will likely bounce back once the situation eases. 
• On the fiscal side, the Government, which has been conservative in its revenue assumptions in the Budget, has the room to pre-emptively cut domestic fuel taxes to nip inflationary expectations, stoke faltering consumption levels and sustain India’s fragile post-COVID-19 recovery through this global churn.

Connecting the dots:

• Russia-Ukraine tension
•  India-Russia Military alliance
•  Indo-US defence deals