While policymakers and analysts say the direct impact of the conflict will be muted, oil alone could have a significant impact by fueling inflation, widening trade and current account deficits, increasing the burden of subsidies and hampering economic recovery, just when it seemed to be gaining momentum.
“Even if only 70-80% of this cost is passed on, it would increase the energy cost of the economy by more than 30%, harming energy use (price elasticity), and therefore the GDP (less dense energy use implies lower productivity, e.g. lower mobility). The impact on GDP may therefore be higher,” Neelkanth Mishra of Credit Suisse wrote in a rating.
An increase from $10 a barrel to $100 a barrel will result in a 30 basis point increase (100 basis points equals one percentage point) in retail inflation, according to an analysis by an industry body . While inflation is the biggest concern, government sources said edible oil supply and payment rights for exporters are the other aspects the Center is working on.
Ukraine being a major source of raw sunflower, supply disruptions are to be expected. “Companies will have to look for alternative sources or push for substitution with rice bran and other cooking means at the household level,” said an executive at a large consumer goods company. Fear of shortages pushed palm oil prices, which were already high, to around 160 rupees per kg. This could increase further, the executive said.
The impact of high prices, disruption of supply chains and general uncertainty could lead to a further slowdown in growth. The latest data showed that growth is expected to be 8.9% in 2021-2022, somewhat slower than the previous estimate of 9.2%. The Center estimated that the economy should grow in the 8-8. 5% in 2022-23 and if the risks persist, this could have consequences for incomes, jobs, income and consumption – a key driver of growth. Rising price pressures will also complicate policy choices for the Reserve Bank of India.
The choppy markets and global uncertainty could also delay the IPO of the mega LIC and put further pressure on government finances as the Center hoped to mop up nearly Rs 70,000 crore. The Centre’s broader privatization program and some major sales of state-owned companies such as BPCL, Shipping Corporation of India and BEML could also face delays and postpone much-needed revenue collection to fund social sector and infrastructure projects.
The commerce sector could also face the brunt of the sanctions. Although India’s trade with Russia and CIS countries stands at around $11 billion, pharmaceutical companies and tea exporters are very concerned as shipments will have to be halted for the time being, not only due to payment issues, but lack of shipping services. “While Ukraine is not a major importer, Russia is a major market (exports were over 37 million kg in 2020). War can stall shipments and re-routing these via Iran will be plagued with payment problems.These export problems will lead to increased domestic supply and therefore lower prices.It is hoped that by the time tea shipments are ready – around May-October – the war will be over,” an industry body said.
Gemstones and jewelry could also be affected. “There is uncertainty because nearly 30% of diamonds come from Russia, 10% of which directly. We hope it will be resolved soon,” said Colin Shah, Chairman of the Gems & Jewelery Export Promotion Council.
The impact will also be felt on the fertilizer industry due to Russia’s ban on the export of ammonium nitrate, which accounts for 30% of the product shipped to the country.