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How will the Russia-Ukraine war impact the Indian economy?

Russia's President Putin meets with India's PM Modi, in New Delhi
REUTERS/Adnan Abidi
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The Russian invasion of Ukraine in February was the largest conventional military attack seen since World War II and can cause a global economic catastrophe.

India had taken a neutral stance, born of its historic strategic partnership with Russia. This alliance, harking back to Cold War times, spans several fronts—diplomacy, defence, nuclear energy, and technology—making Russia a pivotal part of India’s nation-building process, especially during its infancy.

Yet, this is unlikely to shield India from the ravages of a war of such scale. Especially since, in the global geopolitical context, both India and Russia today find themselves ever more closely linked to two others powers, China and the US.

The Russia-Ukraine war crisis

The Russia-Ukraine crisis has stoked uncertainty in global trade and will impact oil and other commodities, according to Sunil Sinha, research director, and principal economist at India Ratings. India may not have a significant merchandise trade with Russia, nevertheless, it stands to lose economically due to supply disruptions caused by Western sanctions.

“Despite India’s limited direct exposure, the combination of supply disruptions and the ongoing terms of trade shock will likely weigh on growth, result in a sharper rise in inflation, and (lead to) a wider current account deficit,” said Sonal Varma, chief economist at Nomura Holdings in a report.

Here are the ways India could suffer due to a Russia-Ukraine war even without being part of it.

Ban on Russia’s crude exports

In reaction to the US’s ban on all oil and gas imports from Russia, Brent crude prices surged to nearly $130 per barrel last week, up 43% from the beginning of February.

This is a major setback for global economic growth as Russia is one of the largest exporters of crude oil globally. India’s trade, however, comprises only 1% oil imports from Russia, but there could be a spillover impact in the form of high inflation and sluggish growth.

On March 13, Morgan Stanley lowered India’s GDP forecast for the fiscal year 2023 by 50 basis points to 7.9%, citing risks to macro stability due to high crude oil prices.

“Even as we expect the cyclical recovery trend to continue, we expect it to be softer than we previously projected,” it said in a report. “We believe that the ongoing geopolitical tensions exacerbate external risks and impart a stagflationary impulse to the economy.”

It was noted that more risks could arise if global growth conditions weaken further, which would hamper India’s export and capital expenditure cycle.

Inflationary concerns

India depends on imports to meet up to 85% of its crude oil needs. The surge in international oil prices to a 14-year high will now result in broader price pressures.

Analysts conclude that the impact on India’s economy will be felt mostly through higher cost-push inflation weighing in on all economic agents—households, businesses, and government.

Every 10% rise in crude oil prices leads to a 0.4 percentage point-rise in consumer inflation, Nomura has stated.

Morgan Stanley pegs retail inflation at 6% for the fiscal year 2023, much higher than the RBI’s 4.5%.

This has increased the risks of a higher import bill and, in turn, a widening of India’s current account deficit (CAD). The CAD is expected to widen to 2.6% of the GDP in the financial year 2023, up from 1.7% last year, according to a report by Nomura Research. This is likely to dent the rupee, which recently plunged to its record low of 76.98 a dollar.

India’s defence supplies

It is believed that the multiple abstentions from a vote in the United Nations from India since the Ukraine invasion were driven by the country’s need to secure its supply of defence equipment, most of which comes from Russia.

Between 2016 and 2020, India accounted for nearly 25% of Russia’s total arms exports, according to trends by a defence think tank Stockholm International Peace Research Institute. This explains that the share of defence expenditure in India’s budget every year is not little.

In its union budget for 2022-23, India allocated $70.2 billion on military spending, up almost 10% over the initial allocation in the previous fiscal. A key defence contract in question is the delivery of the Russia-developed S-400 air missile system worth $5 billion, which was signed in October 2018.

A congressional research service report (pdf) from October 2021 said the Indian military cannot operate effectively without Russian-supplied equipment. The Indian Army’s main battle tank force is composed predominantly of Russian T-72M1 and T-90S, accounting for 66% and 30% of all units respectively, it said.

India will continue to rely on Russian weapons systems in the middle term, analysts say, despite the US’s threat of sanctions over the S-400 purchase looms large over India.

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