- Trust me, sooner than later the fallout of the Russian incursions into Ukraine is bound to have a cascading effect on all countries vis-à-vis supply-side challenges on critical commodities, including energy. India is no exception to the inevitable challenges as a week into the Russian invasion is already showing ominous signs of economic fallout. The immediate fallout is the impact on energy and commodity prices which is global in nature. However, a problem that may linger for a while is further disruptions to global supply chains, partly due to the boycott of the Russian logistics network.
PC:
- Another challenge specific to India will be the loss of supplies of sunflower cooking oil from Ukraine and Russia which is bound to rise domestic tempers. As you are aware, the Indian economic scenario is showing signs of returning to pre-pandemic normalcy even though the consumption pattern is uneven as also labor-intensive sectors are yet to revive on expected lines. The combined impact of these factors will show up most prominently in the form of upward inflation pressure. Reports appearing in the media show that the Indian basket of crude was $111.9/barrel as of 02nd March, about 49% higher than the level that prevailed at the beginning of the year.
- Of course, visible signs point to the price being elevated for a while, which will feed into retail and wholesale inflation. Along with crude prices, commodity prices have been rising, particularly aluminum and nickel where Russia is an important producer. Remember, disruptions in sourcing these commodities will have a far-reaching spillover effect on some industrial products. Recall that the Reserve Bank of India in its February monetary policy, forecast retail inflation in 2022-23 to be 4.5% with risks broadly balanced. No wonder, the environment has changed significantly in a few weeks, and very likely the forecast will be reworked.
PC: Robert Robb
- Since uncertainty looms large in the current situation, risk aversion will prevail, and potential private investment will be shelved. This will leave the government with the task of doing the heavy lifting for another year to build on this fiscal’s recovery which can be done without running huge debts. Inevitably, higher inflation will push up nominal GDP which, in turn, will result in tax collections exceeding budget targets comfortably. Such a scenario offers both Union and State Governments space to overshoot their spending targets which were conservatively pegged.
- Delving further, GOI’s tax collections for FY 2021-22 is set to exceed budget targets partly because the nominal GDP is likely to be four percentage points higher than budget estimates at 19.4%. Likewise, 2022-23 may see nominal GDP to be higher than the budget estimate of 11.1% growth providing the Government space to exceed its FY 2022-23 forecast of a mere 4.6% nominal growth in budget expenditure, without jeopardizing debt sustainability. As such, both Union and State Governments will have to extend support for a while longer and hope the global economic scenario cools off.
