The Russia-Ukraine war, which started about one-and-a-half month ago, is impacting the stability of the global order. Let's analyse the effect the conflict could have on the Indian economy’s nascent recovery from the pandemic.
How has the war impacted oil prices?
Russia is one of the largest exporters of crude oil globally and the Russian invasion of Ukraine has resulted in Brent crude oil prices rising as high as $130 per barrel and currently trading above $100 per barrel. Crude oil prices have risen by about 20% since the war broke out. The impact in terms of increased crude oil prices on the global front can have a spillover effect in terms of cost-push inflation. The war has also resulted in disrupting India’s edible oil market as the country imports more than 90% of its sunflower oil from Russia and Ukraine combined.
How has it impacted global supply chains?
Wheat exports from Russia and Ukraine constitute nearly one quarter of the world’s total wheat exports. While the war has impacted the wheat supply chain, it has opened up an opportunity for India to export to countries that have traditionally not been an importer of Indian wheat. Russia, Belarus, and Ukraine are major exporters of fertilizers also. Thus, prices of fertilizers have risen more than 50% since the war broke out. The war can also exacerbate semiconductor shortages the world has been troubled with over the last two years—Ukraine is a supplier of neon, a key ingredient for making chips.
How has the war impacted the Indian economy?
India is one of the world’s largest net importer of fertilizers. Thus, escalated fertilizer prices could inflate India’s subsidy bills. Increased crude oil, edible oil, and commodity prices will impact the common man. Consumer demand has not recovered and firms are finding it difficult to pass on the impact to consumers. Thus, company margins are also hit.
How should the inflation be managed?
The economy is inching towards cost-push inflation. However, research shows that monetary policy measures become effective in cases of demand-pull inflation. Hence, the Reserve Bank of India’s inflation targeting measures might not yield the desired results. The Union government should take up the responsibility to manage cost-push inflation through fiscal measures. Growth numbers for fiscal years 2021-22 and 2022-23 should be reworked keeping in mind the impact of the geopolitical crisis.
What are the long-term lessons?
The government has taken a balanced stand to safeguard India’s interests. But excessive reliance on Russia for sophisticated arms can be worrisome. This is the one area where atmanirbharata is called for. The government should also urge farmers to give up chemical fertilizers and adopt agroecological farming. Organic fertilizers are cost-effective and help farmers get better prices for their produce. The government should also focus on alternative sources of energy.
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