Impact of Russia Invasion of Ukraine on Global and Indian Economy

Impact of Russia Invasion of Ukraine on Global and Indian Economy

Topic: Economy

Context: Russian invasion on Ukraine impacting the global crude oil prices

Global Impact-War has immediate consequences for global trade, capital flows, financial markets and access to technology.

• Global trade will be immediately impacted by economic sanctions on both sides. Exports and imports will be hit and the existing supply bottlenecks due to the pandemic will aggravate.
• Ukraine is a major exporter of agricultural produce and their supplies will get disrupted, leading to increase in food prices. Commodity prices had already been rising and this will continue since some of the critical supplies come from Russia and China. This will cause global cost- push inflation and slow down global growth.
• Global capital flows will decline since many countries would want their capital to invest at home rather than abroad due to the sanctions on financial flows. The stock markets will decline not only due to this factor but also due to increased uncertainty facing the world and the likely end of quantitative easing by Central Banks in the face of higher inflation and moves to increase interest rates.
• Growth will be hit as a result of these adverse changes in consumption and investment. Budgets of nations will be impacted as military expenditures rise leading to large scale revenue deficits.
• A push towards de-globalization and inward looking trade policy would further aggravate the supply chain disruption.
• The current moves to freeze the assets of Russians in Western banks and to cut off credit to their companies, would force them to devise alternative international payments systems independent of the dollar. 
• With greater investment in armament there will be decreasing investment in social sectors which along with rising inflation would aggravate poverty and  Inequalities.

Impact on India

• Positive impact- Rise in agri-export 
  • Ukraine and Russia account for a quarter of world’s wheat exports, however closing of Black Sea trade route and economic sanctions on Russia would increase India’s competitiveness in global exports for wheat.
  • High export demand for wheat – India has already shipped out 5.04 mt of the cereal in April-December 2021 – could result in lower government procurement this time, compared to the record 43.34 mt and 38.99 mt from the 2020-21 and 2019-20 crops, respectively.
  • The Ukraine crisis has also led to prices of vegetable oils and oilseeds skyrocketing. The benefits of it should flow to mustard growers in Rajasthan and UP, who are set to market their crop in the coming weeks. Mustard prices are ruling at Rs 6,500-plus per quintal, which is above the MSP of Rs 5,050.
  • It can act as an inducement for farmers to expand acreages under cotton, soyabean, groundnut, sesame and sunflower in the upcoming kharif planting season. That will serve the cause of crop diversification – especially weaning farmers away from paddy, if not sugarcane.
• Negative Impact

India will see lower than previously forecast economic growth because of the higher commodity prices amid Russia’s invasion of Ukraine. It will expand 8.9% in the year ending March, according to data released Monday by the Statistics Ministry, which is slower than the government’s projected 9.2% expansion.

• Imported Inflation-The invasion of Ukraine has upended commodity markets from oil to gas and wheat, increasing inflationary pressure.
  • India will see an immediate impact on inflation with rising food prices, as Russia and Ukraine are the major suppliers of corn, barley, and sunflower oil. 
  • Rise in price of crude oil and natural gas- Consumer price inflation which crossed the RBI’s upper tolerance level of six per cent to 6.01 per cent in January is likely to hit the seven per cent mark as crude prices touched $116 per barrel recently
  • Cost push inflation-Other prices will also rise as supply bottlenecks get aggravated due to sanctions and the war situation as Russia being the major exporter of-
    • Fertilizers
    • Raw materials for superconductor chips- neon, vanadiumetc
    • Coal (3rd largest)
    • Petroleum products
  • The investment climate will deteriorate due to the uncertainty-Capital flows into the country will decline leading to a further decline in the stock markets.
  • Risk of twin Deficit-
    • Every $10 a barrel increase in crude oil will see a $250 billion subsidy impact on regulated fuels in India raising the fiscal deficit.
    • The current account deficit will widen to 2.5% of gross domestic product if oil prices sustain above $100 a barrel from 1.7% in 2021-22.
      • Demand for gold is likely to increase leading to its increased import.
      • Rise in import bill of crude oil and natural gas- Though, India’s imports of petroleum products from Russia are only a fraction of its total oil import bill (<1%) and, thus, replaceable.

However, India imports around 85% of its crude oil and natural gas demands and Russia being the world’s third biggest oil producer (after the US and Saudi Arabia) and the second biggest natural gas producer (after the US) has a major share in global supply affecting the overall price of fuel and fuel related products.

• Rise in bill agri import especially vegetable oils- as India imports around 90% of sunflower oil from Russia and Ukraine.
• Exports are likely to be hit due to the decline in growth in the world economy and de-globalisation.
• Payment delay due to economic sanctions.
• Decline in exports to Russia (India exported $3.33 billion worth goods to Russia in 2021)
• With capital flows declining the Balance of Payment which was already turning adverse will deteriorate further.
• Consequently the rupee will weaken compared to the dollar which will aggravate inflation further.

Way forward:

• Immediate Ceasefire: The world is still reeling from the Covid-19 pandemic, which hurt the poorest countries and people the most, it can ill-afford a conflict-induced slowdown.
• New Security Order for Europe: The current crisis somehow results from a broken security architecture in Europe.
• Reviving Minsk Peace Process: A practical solution for the situation is to revive the Minsk peace process.
• India has to brace itself for some immediate challenges flowing from the Russian actions. By diversifying its import regime
• Push to make in India by rising capital expenditure in critical import sectors and further push to renewable energy.
• Global supply chain diversification initiatives.