India’s Economy Faces A Potential Stagflation Risk From Ukraine War

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It has been reported that The Indian economy faces a potential threat of stagflation from the ongoing Russia-Ukraine war, driven by trade disruptions and rising oil prices which will push already high inflation further up, which will hurt growth prospects.

Gross Domestic Data released on Monday showed the economy slowed in the October-December quarter, even before the Omicron variant of the coronavirus disruptions took hold.

The ongoing Russia-Ukraine war is likely to weigh heavily on Asia’s third-largest economy, just when the restrictions from the latest coronavirus wave have started to ease across the country, the report said.

Finance minister Nirmala Sitharaman underscored the government’s concern about the impact on its exports due to the Ukraine crisis.

“As regards to what is going to have a bearing on our immediate imports and equally on our exports to Ukraine, we are rightly worried about what comes from there. But I am more worried about what will happen to our exporters who are doing very well, particularly to the farming sector,” the finance minister said on Monday, interacting with industry captains at an event in Chennai.

IndiaRatings and Research, suggested the geopolitical risks arising from the Russia-Ukraine conflict would push the import bill higher for items such as mineral fuels & oils, gems & jewellery, edible oils and fertilisers, the report said.

India has significant import dependence on these items.

“The immediate impact of the conflict on the Indian economy will be felt through inflation, an increase in the current account deficit and rupee depreciation. A $5 per barrel increase in crude oil prices will translate into a $6.6 billion increase in the trade or current account deficit,” said Sunil Kumar Sinha, Principal Economist at IndiaRatings and Research.

“The ramifications of the Russia-Ukraine conflict on the Indian economy will be felt via higher global commodity prices as India is a net commodity importer. Crude oil has been on a boil, surging to $103.15 last week,” he added.

While there is no clarity on how long the Ukraine crisis drags on, what is clear is that rising oil prices will push up Indian inflation as the country imports nearly 80% of its energy needs.

Global and Indian forecasting agencies have warned in their latest assessment reports that the Russian Invasion of Ukraine will hurt the Indian economy.

“With global oil prices now expected to remain above $100 per barrel until the early stages of H2 2022, due to Russia’s invasion of Ukraine, and other commodity prices also pushing higher, India’s growth is likely to remain relatively subdued throughout most of 2022,” according to analysts at Oxford Economics.

That suggests the risk of stagflation in India remains high.

Stagflation is when economic growth slows and, at the same time accompanied by rising inflation. Stagflation can be alternatively defined as a period of high inflation combined with GDP decline, the report said.

“Stagflation could be a potential threat, though not a real threat currently. In case of persistence of high oil and commodity prices requiring a much more aggressive response by Western central banks, especially the U.S. Federal Reserve, and the feedback loop could be challenging,” said Kunal Kundu, India economists at Societe Generale. (NDTV)