31

Amidst the ongoing Russia-Ukraine war, the International Monetary Fund (IMF) recently pointed out that the ramifications of this war will not only be devastating but far reaching as well. In addition to human suffering and refugee flows, global economies will be encountering slow growth and high inflation. Imposition of economic sanctions on Russia leading to exodus of multinational companies, disrupted trade and broken supply chains are not only going to trigger food and fuel inflation worldwide, but would also corrode business confidence and investment sentiments.

Global Ramifications

No major country of the world would be able to keep itself isolated from this mayhem. Since European countries depend heavily on Russian energy, particularly gas, hence the sanctions are making it increasingly difficult for them to import natural gas. High gas prices are breeding inflation, and Europeans are compelled to bear the brunt to pay more prices for heating. Along with natural gas, crude prices have also surged which are giving sleepless nights to the leaders of petroleum importing countries throughout the Middle East, Asia and Australia, although exporters of oil like the US and the OPEC countries are reaping the benefit of high prices. Worldwide, broken supply chains are making it tough for manufacturing companies to get adequate quantities of raw material to produce goods and services. Additionally, shortage of shipping vessels, containers and freights are leading to higher costs of production. This problem is gradually intruding into the food territory as well. Edible oils, wheat and corn prices are skyrocketing and African food deficit economies are facing a traumatic situation. The conflict and sanctions have also hurt Russia’s migrant workers from Uzbekistan and Tajikistan. Another set of countries in and around Russia are also facing the heat as the remittances of workers working in Russia and Ukraine towards their families living in Uzbekistan to Kyrgyzstan have dried up.

The predicament being faced today will certainly speed up the process towards energy transformation. At least developed economies of the world will increasingly be slashing their reliance on non-renewable resources by redirecting their investment towards generation of clean energy. In the long period, this transition will more or less be similar to what was observed in the 1970s after the Yom Kippur war. In 1973, in order to penalize the countries that supported Israel in a war against Egypt and Syria, OPEC stopped its supply of oil to the countries that supported Israel. Also, the benchmark crude oil prices were raised by 70% along with a decrease in production by OPEC. It led to carnage in New York’s Share Exchange resulting in global recessions. To combat the problem, the United States, European and other countries of the world started creating strategic reserves of petroleum to mitigate such embargoes in future. On similar lines, efforts are now directed to harness wind and solar energy to generate electricity. Late shale oil and gas discovery has transformed the US into a net exporter of petroleum instead of being a net importer. The automobile industry also witnessed a transition with small fuel-efficient cars from Japan, South Korea and Europe outshining the gas guzzling big cars manufactured in the US. This war may give a much needed push to global acceptance of electric vehicles.

Ramifications for India

As far as India is concerned, it is apprehended that there can be three types of effects. These effects will be direct (disruptive trading with Russia and Ukraine), indirect (costlier imports from the rest of the world) and macro-economic (depreciation of Rupee, increase in rate of interest, etc.).  The actual fallout of all these effects will eventually be felt in the form of high inflation, slow recovery from the pandemic or the continuance of stagflation. 

The direct impact of the Russia-Ukraine war on India can be felt in the context of edible oils. 90% of our sunflower oil requirement is met through imports from Russia and Ukraine. Prices of sunflower oil in the Indian market have already started rising. Prior to this war, Indonesia, the top producer of palm oil, heavily increased export taxes – leading to increase of edible oil prices. The Russia-Ukraine war has worsened matters.

Apart from edible oils, increase in prices of petroleum products is also going to create problems. It will entail an increase of wholesale as well as consumer prices. At the start of the month of March, prices of airline turbine fuel (ATF) and commercial gas cylinders were increased by the government. By the last week of March, prices of domestic gas cylinders, petrol and diesel also started witnessing an increase in prices. The Economic Survey had projected crude oil prices for the year 2022-23 to be in between $70-$75 per barrel, whereas the Russia-Ukraine crisis is now estimated to keep the prices hovering around $100 per barrel for the upcoming financial year. If the central government does not bring excise duty down, soaring crude oil prices will bleed oil marketing companies which ultimately will pass on the burden of increasing costs on to the consumers.

To the extent indirect effect of the Russia-Ukraine war is concerned, it can be felt through an increase in prices of metals, mining and electronics industries. Russia is a major producer of copper along with nickel and platinum and Russia and Ukraine together are the major manufacturers and exporters of steel. Stymied supply of cooking coal and natural gas from these two countries has led to an uproar in the prices of steel around the world. Further, an increase in cargo freight and coal prices has increased steel prices. It is leading to a major revision in the prices of motor vehicles and automobiles in India. Already, the industry was hit in the arm due to chip and semiconductor shortage and now the prices of steel are further thwarting recovery. 

As if the Russia-Ukraine war was not enough to spread doom in the Indian markets, a lockdown in the Shenzhen area of China has now surfaced to rub salt on our woes. Covid induced lockdown has been imposed in parts of China that has led to a disruption in the procurement of raw materials and intermediate goods - particularly in the electronics and pharmaceuticals sector. The combined effect of an increase in prices of metals, mining, electronics components and pharmaceutical inputs is bothering the strategic sectors in India namely - power, automobile, real estate, electronic goods, mobile and laptops and medicines etc.  

The cost push inflation is becoming treacherous on account of weakening of the Rupee. As we depend on imported crude oil for 85% of our domestic requirements and higher prices of crude oil simply projecting greater outflow of dollar from our reserves, hence the Indian Rupee will remain under pressure till the international volatility settles down. Depreciated Indian Rupee is also reflecting upon the additional expenditure being made for the imported goods - besides increasing current account deficit.

On the whole, the emerging scenario is projected to bring in massive inflation in the Indian economy. RBI Governor is hard pressed at this juncture to provide low-priced debt to the government and corporates for speedy recovery while simultaneously controlling rising inflation by increasing the interest rates. Already the US Fed and Bank of England have initiated the move towards increasing rates of interest and India cannot afford to lag behind this global trend. An increase in rate of interest means costly credit for the corporates, higher prices of manufactured goods, wretched consumer sentiment and low investment.   

To break this circuit, there is a need to emulate the recent steps taken by Britain. To liberate the people from the pressure of rising fuel prices, record inflation and tardy recovery, their Finance Minister, Rishi Sunak, cut taxes on wages and fuel, besides extending waivers on energy saving material and rolling out employment allowance for small businesses. Such proactive actions by the policy makers can go a long way to address people’s woes. Indian policymakers too, need to formulate such strategies that can offload the Indians from the economic pains bred by the emerging international factors.

— The author is Associate Professor in DAV Institute of Management, Chandigarh

The opinion/s expressed in the article are that of the author’s and do not
necessarily represent or reflect the policy or position of this magazine.