Will India be able to withstand the fresh oil shock which may seriously impact its macroeconomic calculations and the tentative recovery from Covid-19? While the global economy itself is facing the threat of a serious impact, India’s vulnerability needs little stressing. 

This is the third oil shock in history, after the 1973 and 1979 crisis of the Middle East war and Iran, when the oil crisis shook the global economies. The volatility now injected by the crude oil prices is expected to have a deeper impact, particularly on Asian countries like India. As the economies in the region are dependent on oil imports, the financial sanctions imposed on Russia by the US and its European allies would only compound their worries. 

The West has already blocked Russia from the international transaction system by excluding the country from SWIFT (Society for Worldwide Interbank Financial Telecommunication), considered the backbone of international financial transfer system through a messaging system. 

US bans Russian oil 

The latest to affect the global economy is US President Joe Biden’s decision to impose an embargo on oil imports from Russia as a reaction to its aggression on Ukraine. It may be too early to fathom the exact damage to the economy of India, which chose to be neutral in the international geopolitics, but the negative effect it would have been all too evident. 

Nomura, a leading global financial services group, said in its analysis on the consequences of the war on Asia that a sustained rise in the prices of crude oil and food would hurt most countries in the region; the harder hit would be India, Thailand and the Philippines, all net importers of crude oil. These countries would have to cope with higher inflation, weaker Current Account Deficit (CAD) and fiscal balances, and a squeeze on economic growth. 

India imports 85 percent of its crude oil. With the price of the commodity rising, the setback on its economy could be palpable. India imported crude oil at less than $60 a barrel until February 24 when the war broke out; the price spiralled to $100 a barrel mark on March 1. The crude prices have shown no sign of abating. Since March 4, oil prices reached its peak at $140 a barrel. The price has been fluctuating in three figures since then.

Indian worries 

As the worries on the crude oil prices were mounting, Finance Minister Nirmala Sitharaman said that though some provisions for the rising prices in the Budget (for 2022-23) was made, it was based on some average price of oil prevailing earlier. Since it has crossed that assumption, she said it would have to be seen how the problem can be addressed to minimize the effects on the economy. Earlier, she had given a different impression that the oil crisis would not impact her numbers and that there was no need for a relook into them. In her budget, she assumed $75 per barrel. 

With the war comes the concern about the disruption in the imports and freight movement and its increased rates. As the economy was recovering from Covid-19, the government initially hoped that new challenges could be overcome and it could contain its fiscal deficit target for the current fiscal at 6.4 per cent of the GDP with improved tax collections and the proposed Initial Public Offer of shares of the Life Insurance Corp (LIC).  

However, the setback from the Russia-Ukraine crisis and the volatility in the stock market has raised doubts about the launch of the IPO during this fiscal as targeted earlier. The government is still hopeful of pushing the plan, albeit only a little over two weeks remain for the closure of the current fiscal (March 31). This prospect of the delay in the IPO may result in the missing the disinvestment target of Rs.78,000 crore. The government has so far not officially announced the details of the IPO, including its price and size. 

Export fears  

Amid the fog of uncertainties from the war, Indian exporters are worried about exports; they have seen an early trend in declining orders for the key exports of engineering goods and apparels. They are also worried that if the crisis continued, it would impact the overall export demand in the coming months as Europe is the largest market for the Indian exports. This could result in the widening of the Current Account Deficit (CAD is the difference between exports and imports). However, some small relief from an unexpected opportunity could help India soften the blow from the impact of costlier agri-exports like sunflower oil. 

India’s inflation, which reached 6.01 per cent in January, the highest in seven months breaching the upper tolerant level of 6 per cent determined by the Reserve Bank of India (RBI), is also a factor that could add to the worries of the consumers. Though it dipped to 5.1 per cent in February, it remains to be seen if it withstands the negative effects of the ongoing international crisis. The wholesale index, staying in double figures for the 10th month in a row, can only add to the woes of the industry and consumers as it could have a cascading effect on a range of consumer items including sunflower oil (India heavily depends on imports from Russia and Ukraine).  

The consumers may also be in for a shock if the prices of auto fuel (petrol and diesel) and the domestic fuel, LPG (Liquefied Petroleum Gas), are revised after the state election results are known on March 10. Their prices have remained unchanged for seven months. 

Though Russia and Ukraine are still talking, the deep wounds inflicted by the war and the Western sanctions on the economies may take a long time to heal, longer perhaps for some emerging economies in South Asia, particularly India and Bangladesh. 

(The author is a senior economic journalist and analyst. Views are personal)