How the Conflict in Ukraine is Affecting India’s Economy – BRINK – Conversations and Insights on Global Business

India’s trade with Russia is around $10 billion, or 1.3% of India’s total trade. India imports a significant amount of precious and semi-precious stones, mineral oil, boilers, nuclear reactors and fertilizers from Russia, and all of this trade is affected, with a cascading impact on the Indian economy. .

After the United States and China, India is the world’s third largest consumer of oil, more than 80% of which is imported, and oOil and food prices have always haunted the Indian economy.

Two months after the start of the conflict, faced with a sharp rise in oil prices, with a projection of around $140 a barrel, Indian business leaders and policymakers are seriously assessing the impact of this crisis at a time when the businesses are beginning to emerge from the pandemic.

Impact of rising oil prices

India imports about 2% of its oil needs and $1 billion of coal from Russia per year. Indian oil companies have multi-billion dollar investments in Russian oil fields, which is still relatively small compared to India’s oil needs. Conversely, the Russian oil giant Rosneft holds a majority stake in the 20 million metric tons per year of the Indian Nayara Energy.

The most obvious impact of high oil prices is inflation. There has been a sharp rise in diesel and gasoline prices over the past four weeks; and LPG prices were rising steadily even before the conflict. Fuels and electricity have a weight of 13% in the wholesale price index, and fuels and lighting have a weight of 6.5% in the consumer price index. Additionally, fuel and food prices have a cascading effect on the economy as they drive up costs at every stage of agricultural and industrial production.

In its latest update, the IMF forecast India’s economic growth to slow to 6.6% from 7.2% in 2022, mainly due to changes in oil price assumptions. The key assumption behind GDP growth in last year’s Economic Survey of India was that oil prices would be $70-75 a barrel, rather than $100.

The crisis has also pushed up the price of fertilizers imported into India, notably urea and potash from Russia. This threatens to increase the government bill for agricultural fertilizer subsidies by an estimated $1.3 billion, and state and central governments will have to rework their budgets to deal with these cost escalations.

If Russia’s other trading partners adopt their own currency-based trade, such as the Indian ruble-Russian ruble deal, and if an alternative to banking transactions can be found, abandoning trade and dollar-based finance may accelerate.

The silver lining for India’s food exports

However, the Russian-Ukrainian conflict also creates an unlikely opportunity for some Indian exporters of agricultural products, particularly wheat, corn, millet and processed foods.

As the Russian-Ukrainian conflict unfolds, the world is looking for Indian wheat to fill the huge shocks in supply chains from Russia and Ukraine. Ukraine is one of the world’s leading wheat exporters. Together, Russia and Ukraine hold a 25% share of the global market. A ban on cargo from Russia also means more opportunities for Indian exporters of nuts, confectionery, fruits and pulses.

As the price of these products soars to new heights, it opens up new markets for Indian farmers and traders. Until June, no fresh wheat is expected from other major markets such as Australia, Pakistan and Brazil.

Several reports indicate that India will be able to export 10 to 12 million metric tons of wheat this year to markets abandoned by Russia and Ukraine. Expectations of a normal monsoon season this year will further spur a cycle of growth in India’s rural economies, but exploiting the opportunities also depends on how quickly the bid-ask market is established and the improvement of freight infrastructure.

Significant outflow of foreign investment

The impact of all this could have serious repercussions on India’s balance of payments. Due to the inelastic nature of energy demand and the current difficulties in coal imports, any further increase in crude oil prices invariably results in higher import bills for the country. If the conflict continues, it will worsen the current account deficit.

This problem is more acute in India, as companies are experiencing one of the largest outflows of foreign institutional investors in the first quarter of 2022. The looming threat of a US Fed rate hike makes this a task. extremely difficult for the Reserve Bank of India. This will also affect the exchange rate. Thanks to the prudent policies and the forex management strategy, the rupiah did not come under any abnormal pressure.

On the other hand, if Russia’s other trading partners adopt their own currency-based trade, such as the Indian ruble-Russian ruble deal, and if an alternative to banking transactions such as SWIFT can be found , the abandonment of dollar-based trade and finance may accelerate. These kinds of developments after the Russian-Ukrainian conflict can have a huge impact beyond India.

Volatility is the most likely prospect in the near future. As the country begins to recover from the pandemic-induced economic downturn, India’s public and private sectors will need to work to address legacy issues of energy security, inflation and resilience. Supply-side shocks, shifts in demand, the course of the conflict and the extent of global sanctions will all impact the future of India’s economy, while opening new doors to new opportunities. .

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