CRUDE: Ukraine accounts for 45% of the petroleum and natural gas supplies to Europe. A disruption in supply will lead to increase in the price of petroleum products worldwide.
By Arvind Pinto
The immediate impact of the war raging in Ukraine is on Zuari Bridge in Goa. The building of the bridge has been contracted out to the Ukraine-based company Mostobudivelnyi Zahin Ltd, it is the main partner hired to build the cable-tayed bridge.
AS I sit to write this article I cannot but think of the untold misery that it being inflicted on the people of Ukraine by the invasion of Russia. Against all international norms Russia has taken upon itself to invade a sovereign country, while the rest of the world does little but issues press statements. India, beholden to Russia, has diplomatically abstained from censuring Russia, since the country is in the process of buying its armaments.
However, let us look at the economic impact of this war on our economy that is just about recovering from the impact of Covid-19 and lockdowns and cannot confront yet another collapse.
With both Russia and Ukraine, India has a deficit trade balance; this means that our imports from both these countries is more than our exports. In volume our total trade is Russia is $ 9440 million while with Ukraine the trade value is $ 2352 million. The deficit in the case of Russia is $4,347 million while in the case of Ukraine it is $ 1608 million. With supply lines closed due to the war, with a shipping and credit freeze on Russian monetary sanctions, there is a total disruption of trade, which will have a significant impact on the economy. Let’s look at some specifics.
CRUDE PRICES
ONE of the immediate impacts of the war is the rise in crude prices. Brent crude hit $100 a barrel, a commodity that India imports; being a developing country 85% of our oil requirements are being imported. In 2021, oil imports from Russia were 43,400 barrels per day; you may now realize why India abstains from condemning Russia.
Besides oil, India imports coal and liquid natural gas, 1.8 million tons and 2.5 million ton respectively in the year 2021. The total oil bill for the current fiscal is $100 billion. With the west imposing financial and transfer sanctions on Russia, India will not have the facility of doing easy trading with Russia, since both supplies and credit facilities would be in jeopardy. How long will this continue? We will have to ask Vladimir Putin for the answer!
Likewise, India imports 93% of its sunflower seed oil from the Ukraine and Russia. The total sunflower seed oil stood at 2.2 million tons worth $1.96 billion in 2020-21. With the dislocation in supply chain there is a likelihood of an increase in the prices of cooking oil. Prices of cooking oil have already risen in 2021 due to unfavorable weather conditions and labor shortage in these exporting countries due to the pandemic.
Thus, the Ukraine conflict, according to several economists, is set to push the country’s import bill beyond $600 billion this fiscal. This can lead to a spike in inflation, worsen our current deficit and a fall in the value of the rupee. Let’s look at each of these factors.
Post-covid, with the economy yet to pick up, retail inflation is around 6%. The war in Ukraine immediately impacted oil prices as we have noted. Since India is dependent upon oil, with petrol and diesel prices going up, inflation of essential commodities will also increase. Inflation is already hitting most segments of the country. Coupled with a high unemployment rate, inflation will hit those who do not have a steady source of income.
The high import prices of crude and metals will also impact the current account deficit at $9.6 billion July-September 2021 figures, it is equivalent to 1.3% of the GDP. With the increasing rate of imports this figure will escalate. Fortunately, India has sufficient foreign exchange reserves and in the short term, the increasing current account will not create an immediate issue.
However, would India in the long term be in a position to sustain its depleting foreign exchange reserves? In the short term there does not appear to be an area of concern.
RUPEE DEPRECIATION
THE ongoing war in Ukraine has seen the rupee depreciate against the dollar. The dollar-rupee is 75.5 to a dollar. While a weaker rupee is a boon to the export market, with exporters gaining more rupees for each dollar, the import bill is set to rise. India imports its oil on a daily basis and the outflow of foreign exchange has brought our foreign reserves down.
A weakening rupee will hit both our current account deficit while deflating our foreign exchange reserves. As we have said this is not an immidiate problem but will impact in the long term.
Western sanctions on Russia, the ban on aircraft movement, the freezing of Russian monetary assets in the West and the stopping of Russia’s use of the SWIFT for currency transactions will indirectly impact Indian trading relations with Russia. Besides India on the international front is seen as supporting Russia, our trade relations with western countries will also witness a reappraisal and this will impact both our diplomatic as well as trade relations with these countries.
INDIAN IMPACTED
MANY Indian students are studying medicine in Ukraine, since the cost of studying there is cheaper that in India. Many of these students have returned home to India and face an uncertain future, since many of them have still to complete their course. Unfortunately, a couple of Indian students were killed in cross fire this past week. Students are unlikely to travel back to Ukraine in the near future and this means their future careers are at stake!
It is sad that Russia invaded Ukraine. While we see the short term effects on both the world and the Indian economy, what will be the future of the world economic scenario is at present hard to define. Let’s hope that fighting stops and the world come to realize that wars do no long term good for the economy of the world.