According to a report as Already slowing Indian economy will take a more resounding hit from the ongoing Russia-Ukraine border conflict, with skyrocketing oil prices fueling inflation higher and as importers and exporters stay on the sidelines in a wait and watch mode.
India, which meets nearly 80% of its oil needs from imports, faces the risk of inflation hitting consumer demand as global crude prices rose above $100 a barrel to multi-year highs.
Based on the Reserve Bank of India’s analysis, that jump in oil prices of about $30 since January from around $70 back then – will add about 1.5 percent to inflation, the report said.
Supply-side bottlenecks leading to runaway inflation have been India’s bane for years. The current global environment of higher price pressures led by the coronavirus-driven supply chain disruptions will further add to the country’s woes.
Indian Economy
“Although ongoing geopolitical tensions between Russia-Ukraine can hurt Asia through multiple channels, such as tighter global financial conditions, elevated uncertainty and the risk of weaker global demand, higher commodity prices are the most important transmission channel,” said Sonal Verma, Chief Economist – India and Asia ex-Japan, at Nomura.
“In India, we expect higher oil prices to increase the risk that consumer price inflation breaches the upper bound of the RBI’s 2-6% inflation range – pushing the RBI further behind the curve, weigh on government’s fiscal finances – if excise duties are cut again, weaken consumption demand and push the basic balance of payments deeper into deficit – of over $40billion in FY23,” she added.
Economic Survey
The government’s annual economic survey forecasts India’s economy will grow 8.0 percent to 8.5 percent for the fiscal year starting in April, down from 9.2% projected for the current year.
That report, tabled by finance minister Nirmala Sitharaman in parliament ahead of the annual budget in late January, warned about risks from global inflation and pandemic-related disruptions. And back then global oil prices ranged between $70 and $75 per barrel, the report said.
Gross Domestic Product (GDP)
With crude oil above $100 a barrel, it will have a multiplier impact on consumers.
For now, though, the government has absorbed the rise in global crude prices as several states are in the midst of elections, but the risk is oil companies post the elections will start to take retail prices higher and hurt consumer demand.
Private consumption, accounting for nearly 55% of GDP, remains weak amid rising levels of household debt, while retail prices have soared since the coronavirus outbreak began in early 2020, the report said.
According to a Reuters poll of economists, the economy likely slowed in the final quarter of 2021, even before the Omicron variant of the coronavirus restrictions. Gross domestic product (GDP) data for the October-December period is due Monday.
Economic Growth
While most states have eased those curbs and opened up business activity, Russia’s attack on Ukraine has dented hopes of a quick recovery and will further weigh on economic growth.
“A sustained rise in oil and food prices would have adverse impacts on Asia’s economies, manifested through higher inflation, weaker current account and fiscal balances, and a squeeze on economic growth,” said Nomura’s Ms Verma.
“Most Asian consumers have not yet fully recovered from the pandemic and have lower savings, so higher inflation can squeeze real disposable incomes and weaken the incipient consumption recovery. The impact could fall disproportionately on lower-income households since food demand tends to be inelastic. For a 10% oil price rise, GDP growth could be 0.2pp weaker in India,” she added. (NDTV)
