In Asia, India likely to be among the worst losers of the Russia-Ukraine war

In a recent report, financial services company Nomura has said that in Asia, India is likely to be among the worst losers as a result of the ongoing Russian invasion of Ukraine. “Sustained rise in oil and food prices is likely to have an adverse impact on Asia’s economies, manifested through higher inflation, weaker current account and fiscal balances, and a squeeze on economic growth. In such a scenario, India, Thailand, and the Philippines are the biggest losers, while Indonesia would be a relative beneficiary,” the report authored by Aurodeep Nandi and Sonal Varma said.

Given India’s net oil importer status, experts say, it’s also likely to be impacted by rising oil prices. “Rising crude oil prices are a negative terms-of-trade shock for consumers and businesses and we estimate every 10 per cent increase in oil prices would shave off ~0.20pp from GDP growth,” the report said.

Experts also feel that the Russia-Ukraine crisis can have a multi-dimensional impact on the Indian economy depending upon how long the tension simmers. “Since Russia is an important supplier of energy (crude oil and natural gas) to the rest of the world, the primary manifestation of this geopolitical unrest would be on India’s inflation and its twin deficits,” Vivek Kumar, Economist, QuantEco Research said.

According to QuantEco Research, from a statistical perspective, a USD 10 pb increase in price of crude has a first order impact of approximately 20 bps increase in CPI inflation. “The actual impact depends upon second order effects as well as the degree of pass-through. If the government chooses to provide relief to consumers and opt for Rs 5 cut in excise duty on petrol and diesel, then this could partially curb the upside to CPI inflation by 8-10 bps. However, the annualized cost of doing so could set the exchequer back by Rs 575 bn,” he adds.

The overall impact on inflation could run beyond fuel items as Russia and Ukraine put together are important source of sunflower oil, fertilizers, and palladium for India.

“While importers could run down inventories in the short-term, persistence of the crisis could lead to higher prices in these products in the medium term. In a nutshell, the Russia-Ukraine crisis if persists for long, can reduce India’s fiscal buffers, increase INR’s sensitivity to global volatility, keep inflation risks elevated, and prompt the RBI for moving forward on monetary policy normalisation,” he said.

The research company also points out that some minor adverse impact on exports (primarily electrical machinery, chemicals including pharmaceuticals, and iron & steel) can also be expected on account of uncertainty on the order front.

“If current prices persist, then India’s current account deficit could potentially jump from 1.5 per cent of GDP in FY22 to 2.5 per cent in FY23. This will also have ramifications for portfolio investors, who would up their caution levels as pressure on deficit increases in an environment of rising global interest rates,” it said.