Editorial

Published: Feb 28, 2022
Updated: Feb 28, 2022

Ukraine War Can Single India

The ongoing Russia-Ukraine dispute that has its genesis in geopolitical frictions since February 2014 culminated in Russian supremo Vladimir Putin declaring war on Ukraine last Thursday (February 24, 2022). The blatant Russian attack on its neighbour, ignoring US and European sanctions, has stunned the entire world, more as the global economy is yet to recover from the adverse impact of the Covid-19 pandemic. Apart from Western sanctions on Russia, no other measure has been taken to help Ukraine in its David versus Goliath encounter with a major military power like Russia. The war will do immense harm not only to an embattled Ukraine but will also adversely impact the economies of various countries, including India.

Though India is not directly involved in any aspect of the war, it cannot keep itself insulated from the indirect impact of the war. For instance, the war has accentuated the upswing in crude oil prices with Brent oil – which India imports – crossing the $ 100-a-barrel mark. As India imports almost ——— per cent of its oil requirements, the country’s import bill will go up substantially. Besides, the upswing in oil prices will lead to a spurt in prices of several other commodities like chemicals, fertilisers and paint.

At a time when the Modi government has miserably failed to contain the rising inflation, the Ukraine-Russia war will further intensify the inflationary pressures, turning household budgets of millions of Indians topsy-turvy.

Though India does not depend on Russia or Ukraine for crude oil, almost all of Europe does. With the disruption in the supply chain, there will be a shortage of supplies of oil and the market prices for the commodity will shoot up, upturning the budget estimates and raising the fiscal deficit.

The government is clearly worried over the adverse impact of the war on India’s trade, and Prime Minister Narendra Modi has had comprehensive discussions on the issue with Union Finance Minister Nirmala Sitharaman, who has herself voiced serious concerns over the exports of agricultural commodities to both Russia and Ukraine. Overall, Russia accounts for 1.5 per cent of India’s imports and 0.8 per cent of India’s exports in terms of value. Though direct trade exposure is very low, select trade exposure such as exports from India and sunflower imports from Ukraine can be affected. While 13 per cent of India’s tea exports goes to Russia, 84 per cent of India’s sunflower oil is imported from Ukraine. Needless to say, disruption in sunflower oil supplies can be a pressure point on India’s retail inflation.

As one expert points out, every 10 per cent increase in crude oil raises retail inflation (measured by CPI) by about 40 basis points (bps). If this sustains for about a year, it will slow the GDP growth rate by 20 bps while the current account deficit will rise by 30 bps.

Besides, the Indian government will have to figure out the payments issue as the US and its allies have committed to exclude select Russian banks from the SWIFT global payments system as part of their sanctions.

Equity markets being most sensitive assets, the war has led to widespread nervousness and generated uncertainties. Indian companies sizeably involved in Russia like Dr Reddy’s Labs and Sun Pharma are bound to be affected. The overall market sentiment will remain uncertain but prudent Indian investors need not panic and should wait for the war clouds to dissipate. Needless to say, they will have to stay selective while picking up stocks.