There Will Be No Direct Impact of The Russia-Ukraine Crisis On India: Report

Conflicts between Russia and Ukraine are still boiling, and global markets have been plunged by the uncertainties surrounding the crisis. The turmoil has had a significant worldwide economic impact, with stock markets and currencies falling drastically, gold prices rising, and crude oil prices reaching their highest level since 2014. And the rise in crude oil prices has thrown India's economy into disarray since higher crude prices have a negative impact on inflation and the current account deficit (CAD).

However, according to the Bank of Baroda Economics Research report issued on 25th February 2022, there will be no direct impact of the Russia-Ukraine crisis on India in terms of bilateral trade, however surge in oil prices as a result of the crisis pose considerable risks to the Indian economy. Higher oil prices pose risks to external stability and currency movement.

The report also says that "Economic impact of the Russia-Ukraine crisis is likely to be through higher oil prices. Since India is a large consumer of oil much of which is imported, the impact of higher oil prices is likely to be visible not only on trade deficit and currency but will also impact inflation and fiscal situation. It must be noted that both the Union Budget and RBI's monetary policy announcement came much before this crisis and did not factor in the impact of the crude price shock. Both the Budget and RBI hence took a conservative estimate of crude prices ~US$ 75/bbl which is likely to be a challenge going forward."

As per the Economics Research report of Bank of Baroda, India imports more than 80% of its total oil requirement and is the world's third largest importer of crude oil. In FY21, India's oil imports totaled US$ 82.7bn. In FYTD22 (Apr'21-Jan'22), oil imports have risen to US$ 125.5bn driven in part by economic recovery as well as higher oil prices. However, with oil prices now hovering at an 8-year high, oil imports are likely to be higher.

"We estimate that for every 10% increase in oil prices on a permanent basis, oil imports are likely to inch up by US$ 15bn or 0.4% of GDP. This will get reflected in higher current account deficit. On the positive side, India also exports some refinery products and is likely to benefit from higher oil prices. This will likely offset some of the negative impact on imports," the BoB report said.

The BoB report also claims that "Rupee has come under pressure due to higher oil prices. Higher oil prices lead to burgeoning trade deficit and hence adversely impact the external stability. This lead to currency depreciation. On 24 Feb 2022, when the news of Russia's offensive against Ukraine broke, oil prices inched up by 2.3%. Concomitantly, INR depreciated by 1.4% registering its steepest single-day decline since Apr'21. With uncertainty around the future course of the war, INR is likely to remain volatile. Hence, RBI may announce more USD/INR buy/sell swap auction to manage volatility in the forex market. We expect INR to remain under pressure given the elevated level of crude prices and trade in the range of 75-77/$ in the near-term."

"Crude oil related products carry a weight of 7.3% in the WPI basket. Hence the direct impact of a 10% increase in oil prices is estimated to be around ~0.7% on WPI. Adding the indirect impact, the overall effect can be around 1% increase in WPI inflation," says the report.

As per the Economist report of BoB "The impact on CPI inflation will be both direct and indirect. First is the direct impact. Petrol and related products have a weight of 2.4% in the CPI basket. However, retail prices of petrol and diesel at pumps also include excise, VAT etc. which will remain unchanged. Even if the base rate of petrol/diesel goes by 5%, the actual impact on the retail prices is estimated to be ~5%. Hence, we estimate that the direct impact of a 10% increase in oil prices is only ~0.15%. Higher oil prices will also feed into supply chains and push prices of other commodities and services upwards. The indirect impact of this pass-through is likely to be higher at about 0.25%-0.35%."

"India's exports to Russia were US$ 2.7bn or 0.9% of India's total exports. These are mainly pharmaceuticals and electrical machinery. India's imports from Russia were US$ 5.5bn or 1.4% of total imports. Petroleum products form half India's imports from Russia and can be easily replaced with other markets. Hence impact on India's bilateral trade with Russia is not likely to be significant," the report says.

Considering the fiscal impact, the BoB report says "The fiscal response to the crude oil price needs to be monitored closely. As stated earlier, the government has assumed oil prices at US$ 75/bbl in the Budget. Notably, the government lowered its subsidy bill for FY22 and FY23 significantly. This included cutting subsidies on petroleum products as well. Further, it must be noted that the government had cut excise duty on petrol and diesel by Rs 5/litre and Rs 10/litre respectively in Nov'21. With the government walking on the narrow road of fiscal consolidation and an already elevated borrowing programme, the fiscal space for increase in subsidies or excise duty is limited."