A gunpowder coated butterfly effect, if you will. As guns and tanks rumbled across the steppes on February 24 when Russia invaded Ukraine, it blasted a deadly hole in the pockets of the average Indian. 100 days after the start of the war in Ukraine, its impact on India, like most elements of a globally connected economy, is almost total.
In those 100 days, a turbulent spring as the country was about to get back on its feet after the Omicron Wave turned into a scorching summer of discontent. From basmati to cookies and trendy plane tickets, the price hike seems to have turned into the straw that finally broke the camel’s back. Even a duty cut that lowered fuel prices by almost Rs10 has yet to save.
“The war in Ukraine is having a short to medium term dampening effect on the Indian economy, both in the real and financial sectors,” said Anusree Paul, associate professor at BML Munjal University School of Management. “The magnitude was further amplified due to the coexistence of the ongoing pandemic.”
Ironically enough, the start of the war seemed to bode well for the Indian economy. India’s exports have been increasing over the past few months and improving exchange rates seemed like a boon (the value of the dollar against the rupee fell from Rs 74.6 on the day the war started to Rs 77.5 to date). Sanctioned by the West, Russia was desperately offering cheap oil, and it looked like India’s wheat surplus could reap a windfall as it stepped into the vacuum left by the two countries’ halt to exports at war, who were the world’s leading producers of food grains. .
But the best-laid plans have had a brutal reality check – that cheaper oil has yet to materialize; except for a few private oil retailers who managed to order some. Russian oil makes up a tiny percentage of India’s oil basket anyway, which comes mostly from countries closest to the Persian Gulf.
When it comes to wheat, all those dreams of an export bonanza came crashing down after three months, as a hotter-than-ever summer devastated local crop yields. And as unscrupulous exporters began to divert domestic supplies to the export market, a government worried about what this would ultimately mean for domestic consumption was forced to step in and order an export ban. Same for sugar.
Not that it can do much about world oil prices. On February 24, the day the war began, the price of crude oil was at $85 a barrel. Within days, it peaked at $127, with the rate to date at a still unbearable $117.
On the retail side, as the Modi government froze prices for a few months due to crucial Uttar Pradesh Assembly elections, the rise after the polls saw petrol prices hit Rs121 (in Andhra Pradesh). A benevolent reduction in excise duty by more than Rs.8 did not give citizens much respite; it remains to be seen whether this will have a domino effect on reducing overall prices
Indeed, an increase in fuel prices translates directly into increased transportation costs for everything from food grains and vegetables to commodities and finished goods. “The high price of crude oil is having a ripple effect on all industries, driving cost inflation close to double digits,” Paul explained. “It (has) had an impact on the economic cycle involving business and government through a multiplier effect.”
At the macro level, while the Ministry of Finance keeps a brave face on its ambitious fiscal plans to spend massively on infrastructure projects to stimulate the economy, there are indications that spending may need to be cut to deal with the new challenges of inflation, high rates the outflow of oil imports and the government of nearly Rs.2 lakh crore decided to waive the two fuel duty cuts in the last six months.
Tariff reduction or not, prices continue to soar, and this is worrying for the Modi government; Coupled with shortages and the impact of Covid, this could spell bad news by any measure. Inflation peaked at 7.9% in April, the highest in eight years. Everything from wheat (price up 15% from 2021) to sugar (5%) to lentils (masoor dal price up 11.6%) has soared.
Edible oil is another area of serious concern – sunflower oil once came from Ukraine and now costs the, uh, sun. Indonesia recently banned palm oil exports, while prices of vanaspati and mustard oil, favored by large sections of ordinary Indians, have soared.
The vicious cycle has been completed by rising prices for everything from steel to fertilizer. This has caused prices to rise for everything from cars and bikes to even, believe it or not, matchboxes.
“This has put significant pressure on the pockets of middle and low income households as real income declines in the short term,” BML’s Paul pointed out. The great danger, and it is already happening, is that the middle and lower classes will reduce their consumption, which will lead to a new vicious circle of slowing overall economic growth.
The international rating agency Moody’s, however, believes that this is not all bad news. While he acknowledges that the oil and food price spike will have a big impact, he still believes that India’s growth story will continue. “The global economic fallout from the Russian-Ukrainian military conflict will drive up inflation and interest rates in India, and create supply constraints,” Moody’s said in a fortnightly note, but added that, “Several months into the conflict, fears of the impact have subsided. Not sure the man on the street in India fully agrees.