Russia – Ukraine Conflict – Where Does the Indian Economy and Politico Stand
Introduction
The Russia-Ukraine ongoing conflict has created severe political and economic repercussions worldwide.
On February 24, 2022, Russia declared war against Ukraine, which has had repercussions and impacts on various areas and facets of the Indian and world economies. It is the biggest conventional military assault since World War II and has the potential to cripple the world economy.
Due to its long-standing strategic alliance with Russia, India adopted a neutral position. This connection, which dates back to the Cold War era, covers several areas, including nuclear energy, technology, and diplomacy, making Russia an essential component of India’s nation-building process.
However, this neutral position did not protect India from the repercussions of a conflict of this magnitude.
How is the war affecting the Indian economy?
A conflict has a global influence whether it is fought within one nation or between two nations. The fifth month of the Russia-Ukraine conflict is close to an end.
Here are some of the effects of the conflict in India:
1. Impact on crude prices
One of the world’s greatest producers of crude oil is Russia, and as a result of the sanctions the US placed on Russia, the price of crude oil increased.
It surpassed $100 per barrel, the highest level in 14 years. In the wake of Russia’s invasion, Brent crude prices, which were about $ 80 per barrel at the beginning of 2022, soared as high as $128 per barrel in March.
Source: https://www.moneycontrol.com/commodity/crudeoil-price.html
Crude oil is used in many industries, such as petroleum, transportation, airlines, logistics, refinery, etc.
As crude oil became more expensive, diesel and petrol prices increased, and the costs of goods and services also surged. This increased inflation and eroded purchasing power, reducing economic growth.
2. Rise in Inflation
Up to 85% of India’s crude oil requirements are satisfied through imports, and with the rise in crude oil prices, broader price pressures emerged.
Below is the inflation data for six months:
January 2022 – 6.01% February 2022 – 6.07%, March 2022 – 6.95% and April 2022 – 7.79%, May 2022 – 7.04%, June 2022 – 7.01%.
Source: https://tradingeconomics.com/india/inflation-cpi
RBI projects a 4.5% inflation rate for FY2022-23, whereas Morgan Stanley predicts retail inflation to be 6%.
Early signs of this tendency include rising commodity costs for fuel, metals, edible oil, and various other goods. Additionally, increasing consumer prices may halt investments and discretionary consumer spending.
Due to this, there are now greater chances that import costs will rise and India’s current account deficit (CAD) will worsen.
3. Depreciation of Rupee
On July 19, 2022, the Rupee fell to an all-time low for the first time in history and crossed 80 per dollar. The leading causes include global events, including the conflict between Russia and Ukraine, tightening global financial conditions, and rising crude oil prices.
The spike in crude prices only worsened matters as the weaker Rupee made imports more expensive.
Source: https://tradingeconomics.com/india/currency
The chart indicates how the Rupee depreciated significantly after the war was declared.
4. Degrowth in GDP
Rising crude oil prices, devaluation of the Rupee and imports becoming costlier lead to consumer spending decreases. Thus, the Gross Domestic Product (GDP) also declined in the past few months.
In January 2022, GDP was estimated to be 9.2%, the second estimate released in February 2022 showed an 8.9% growth in GDP, and finally, the actual estimate released in May 2022 showed an 8.7% growth.
Considering concerns to macro stability brought on by high crude oil prices, Morgan Stanley reduced India’s GDP prediction for the fiscal year 2023 by 40 basis points to 7.2% on July 18 and further expected FY24 GDP to slow down to 6.4%.
5. Impact on the stock markets
Amid the war, stock markets faced extreme volatility showing inflation concerns, increasing interest rates, rising crude oil prices and devaluation of the Rupee.
Amid extremely volatile global indices, the Indian stock market has fallen 9% in the first half of 2022, worrying investors about the future of their portfolios. Since the start of the year, Sensex has decreased by 8.96%, while Nifty has decreased by 9.01%.
Moreover, until now, foreign portfolio investors have pulled almost $14 billion from Indian equities markets. The prime reason concerning this is the increasing interest rates in the US.
6. Reliance on Russia for defence supplies
25% of Russia’s arms export yearly are because of India.
More than $70 billion has been set aside for military spending by the Indian government in the current union budget. The $5 billion Russian-developed S-400 air missile system is a significant defence contract that was agreed to in October 2018.
It is also believed that the Indian military cannot function efficiently without equipment from Russia.
7. Increased wheat exports
Due to the war, grain exports from Russia and Ukraine, two of the world’s top producers and exporters, have been suspended, creating a possible market gap.
However, because of the conflict, the supply is being disrupted, and India is filling the void by expanding wheat exports.
What is India’s stance on the Ukraine-Russia crisis?
India adopted a neutral stance in the war, according to Prime Minister Narendra Modi, who noted that India has ties to both Russia and Ukraine.
Many Indians, primarily students, were evacuated, even from the most dangerous and busy areas of Ukraine like Kharkiv and Sumy.
Every facet of life, from politics to economics, is impacted by war. India needs to be prepared for the challenges that come with this war. Moreover, they need to decrease their reliance on imported items, especially crude oil, to avoid getting once more caught in the middle of the conflict between the West and Russia – at least not when it comes to the issue of energy security.
