- It was widely anticipated that the Russian strongman Vladimir Putin will precipitate the crisis surrounding the invasion of Ukraine sooner than later. As it turned out, the Russian military was ordered to surge ahead into the Ukrainian capital by declaring a war much against the wishes of the international community. Now that the war is raging on in full swing across the battered Ukrainian region, what it portends for the global economy needs to be debated in right earnest. As the global community is glued to television watching in horror the disturbing visuals of destructions perpetrated by the Russian military’s invasion, the contours of the economic fallout on India are beginning to emerge.
PC: Alexei Nikolsky
- The impact is likely to be felt through two channels. Let us see what they are. As is its wont, the immediate impact has come through a surge in crude oil price. Most worryingly, the Indian basket breached the psychologically important barrier of $100/barrel on 24th February 2022. Undoubtedly, this will feed into inflation and keep it at an elevated level for sure. Additionally, another impact on India’s retail inflation is likely to be felt in cooking oil prices as Ukraine and Russia together dominate sunflower oil exports. The Reserve Bank of India’s challenge is unlikely to be limited to dealing with inflation.
- Mind you, the economic disruption caused by the conflict and its fallout will lead to a churn in international financial markets as investors rebalance portfolios to account for changes in risk. As if on cue, the Union Finance Minister has indicated that the current conflict will challenge India’s development. Elevated oil prices undo a crucial budget assumption of average oil price between $70-75. However, with indications from both Russia and Ukraine that they are open to talks, the portents are not all negative giving rise to hopes of a much-needed ceasefire from the unyielding conflict.
PC: Srishti Jha
- In the Indian context, the conflict comes at a worse time when private consumption remains weak and global supply chain disruptions have pushed up prices of key intermediates in manufacturing.It’s a given fact that the western response to Russia will take the form of economic sanctions. Of course, two overarching aims of the sanctions are to impose financial costs on Russia and squeeze its economic base. Among the tools to be used are the ejection of select Russian banks from the SWIFT payment system, which handles international payments networks. These sanctions are unlikely to have a significant impact on India as our hydrocarbon imports are largely from West Asia.
- Nonetheless, Russia is India’s most important arms supplier where the two sides have been working on strengthening the system of settling mutual payments in national currencies. Indeed, India’s overdependence on Russian arms poses a geopolitical risk as around 63% of our total arms imports originates from there. Of course, lessening this dependence has to be a priority. Against this backdrop, the initial impact of the conflict and subsequent developments may not be severe. However, India’s fiscal and monetary policies will have to be in sync to manage price pressure without weakening drivers of economic growth. Keep fingers crossed and hope that the unfolding events will be not too detrimental to our interests!
