Impact of the Russia-Ukraine conflict on the Indian Economy
(The facts mentioned in the article have been written as per the latest data available as on 22nd March, 2022. Considering the dynamic nature of the ongoing Russia-Ukraine war, some data mentioned in the article is bound to change over a period of time.)
As economies around the world were on their way to recuperating from the devastating impacts of the COVID-19 Pandemic, the Kremlin declared war on Ukraine on February 24, 2022, thereby jolting the entire system once again. Besides the humanitarian crises, the IMF has predicted that the entire global economy shall reel under the effects of Russia’s invasion of Ukraine primarily through three channels- higher commodity prices like those of food and energy, disrupted trade leading to an adverse impact on supply chains and high uncertainty among businesses and investors weighing on asset prices. Succinctly put, the war has sent forth grim signals of a global economic fallout in terms of skyrocketing inflation and dented growth.
The ongoing conflict has not left the Indian economy unscathed. While some sectors have already seen a detrimental effect, others are susceptible to a looming crisis.
Here is how some of the crucial sectors of the economy have been affected by the Russia-Ukraine crisis:
- The Crude Oil Sector
The global oil market is mired in turmoil owing to the Russia-Ukraine war. Brent prices almost neared $140 per barrel in March, 2022, the highest-ever since 2008.
India heavily relies on imports in order to meet its oil requisites- approximately 85% of the nation’s average daily crude oil requirement is met through imports. Though, as per the Government of India, India imports only 0.2% of its oil requirements from Russia, the domestic oil prices in India have been rising because they are closely linked to the international prices. As of 22nd March, 2022, domestic petrol and diesel prices were hiked by 80 paise per litre while LPG prices were increased by Rs. 50 per cylinder. As per a recent report, Current Account Deficit (CAD) is likely to widen by $14-15 billion (0.4% of GDP) for every $10 barrel rise in the average price of the Indian crude basket. Being an import-reliant country in this sector, India is exploring the possibility of importing Russian oil at discounted rates. India’s import of crude oil from Russia in March, 2022 is nearly four times more as compared to March, 2021 amid sanctions imposed by the United States on Russia.
- The Automobile Sector
Russia is one of the largest global exporters of palladium, an essential metal for semiconductors, and the second largest exporter of titanium, a metal widely used in semiconductor manufacturing. Ukraine controls almost 70% of the world market in neon gas, which is extensively used in chip plants as lasers in the lithographic chip-manufacturing equipment. It is highly likely that the Russia-Ukraine conflict may strain the semiconductor industry globally in the form of supply shortages and price hikes of various inputs used in the industry and India is no exception. As the Indian semiconductor sector was gradually making its way to normalcy after the pandemic-induced chip shortages, the current war in Ukraine has the potential to aggravate the situation. As per a report by Moody Analytics, the prices of neon gas have surged 10 times owing to the Russia-Ukraine crisis, thereby posing an undeniable threat to the semiconductor supply chain and automobile manufacturing in the Asia-Pacific region.
- The Edible Oils Sector
India imports almost 55% of its edible oil consumption requirements, making it the world’s largest importer of edible oils. Moreover, India imports more than 90% of its soybean oil from Russia and Ukraine. Owing to the Russia-Ukraine conflict, the supply chains of edible oils have seen immense disruption, thereby raising the prices of palm and soybean oil to record highs in the Indian market.
This is how some of the crucial sectors of the Indian economy have been affected by the war so far. As per ratings agency Moody’s Investors Service, India’s 2022 growth forecasts might drop by 0.4% points from 9.5% to 9.1%. As time progresses, actual spillovers of the Russia-Ukraine conflict on various nations across the world, including India, shall become more evident. At this point of time, we can hope for peaceful measures to be taken in due course.
–Ayati Mishra (SYBSc Div-2, 2020-2023)