Russia-Ukraine conflict can derail India's GDP growth in FY23

The worsening conflict in Ukraine will have severe repercussions for a pandemic-battered global economy. As Russia has declared that a military operation is under way and western countries are launching sanctions, the outlook looks grim for the revival of world economies. The immediate outcomes have been a spike in crude oil and natural gas prices while international stock markets have been rocked by volatility for many days now. European countries will have to look for other suppliers to meet 30 per cent of their energy needs which emanate from Russia. As part of the new sanctions, Germany has already blocked certification of the Nordstream 2 pipeline that was meant to augment gas supplies directly from Russia, instead of going via Ukraine.

Like the rest of the world, the Indian economy will face the fall-out of these geopolitical tensions. Finance Minister Nirmala Sitharaman has already warned that it could take a toll on the country's financial stability and that the situation especially crude oil prices is being monitored closely. The psychological 100 dollars per barrel mark was crossed as soon as Russian President Vladimir Putin announced that a military operation would be taking place in the Ukraine. In this backdrop, it is clear that the forecast of 125 dollars per barrel over the next few months is a likely scenario. Hopefully, it will remain below the highest ever level of 147 dollars reached in 2008.

The net result of higher prices is that budgetary estimates which were based on an average price of 70 to 75 dollars per barrel during 2022-23 will have to be completely reworked.

The oil import bill which is estimated to be around 110 billion dollars in the current fiscal, will rise significantly next year. The higher burden on the exchequer will mean that the current pause in raising retail prices of petroleum products will end and pump prices are bound to go up. The pause over the last three months has evidently been linked to electioneering in key states including UP. Though technically the oil marketing companies are free to raise prices in tandem with international rates, effectively these public enterprises wait for clearance from the administrative Petroleum Ministry. With the existing level of retail prices linked to global prices of about 82 to 83 dollars per barrel, it seems inevitable that a price hike is on the cards as soon as state election results are out.

The option of cutting the high excise duties on petroleum products, could certainly be resorted to in order to prevent a high burden on consumers. But with the prospect of a growing oil import bill, it will have to be seen whether the exchequer can bear the loss. Last year's excise duty cut on petrol and diesel cost Rs. 60000 crore. Revenues have been buoyant in 2021-22, but expenditure commitments especially for infrastructure projects are also higher than usual so this would be a tough call.

With higher fuel prices on the anvil, inflationary pressures on the economy will mount further. This could push the central bank into raising interest rates earlier than expected. Inflation was reported to be about 6 per cent in January this year, higher than the 5.66 per cent recorded in December 2021. This is also on the higher side of the inflation band of 4 to 6 per cent set by the Reserve Bank of India. In case this is breached soon, the RBI may put its focus back on inflation rather than on growth and raise rates like many other central banks around the world.

With the Ukraine crisis leading to higher outflow of foreign exchange due to more expensive oil purchases, there could also be pressure on the rupee, which has already begun to depreciate to some extent. Apart from oil, however, other commodities especially metals may show a surge in international markets. As Russia is a major producer of aluminium and nickel, both metals are already ruling at multi- year highs. This is significant for industrial consumers here as India has become a major buyer of aluminium scrap even though it has enough of the metal to meet domestic demand. Nickel which is a key requirement in many industries has also become a high priced commodity.

Other metals where Russia is a major supplier include platinum and palladium. It is the largest producer of palladium and the second largest for platinum. Both these precious metals are used, apart from jewellery, for critical manufacturing purposes. Palladium especially has gained in value in recent years, owing to use in catalytic convertors for automobiles. Prices of both these metals are now rising rapidly in world markets. There is no doubt, therefore, that the geopolitical tensions over Ukraine and the launch of sanctions against Russia on this account will have widespread ramifications for the global economy.

Stock markets are already exhibiting volatility in many countries. In India, for instance, the stock markets have been on a roller-coaster ride ever since the crisis erupted owing the likely impact on the country's economic revival. Foreign institutional investors have already been withdrawing from Indian markets over the past few months owing to the US Federal Reserve's decision to raise interest rates and tighten the easy money policy of the pandemic period. This was expected to be a short term phenomenon but with the Ukraine situation having deteriorated, it may be for a longer period.

With the third wave of the pandemic only receding now, the government sought to shore up the fragile recovery in its latest budget by putting the focus on infrastructure spending. The geopolitical tensions in distant Ukraine, however, are likely to disrupt plans to achieve 8 per cent growth in the next fiscal. The government has no option but to immediately review the economic scenario to meet the new challenges and revise its strategies for the near and medium term.