Unexpected, but also unacceptable

Russian invasion's multi-dimensional impact, and India's meek acceptance of the damage done to its economy

The Russian invasion of Ukraine has upended the global recovery from the pandemic. Estimates of global output growth over the coming year have been slashed by almost a percentage point by many forecasters, including the International Monetary Fund (IMF) and the World Bank. The IMF has warned of a further downside of two percentage points if financial market turmoil persists and energy prices spiral higher. China’s Covid-19 scare and associated lockdowns will only intensify this effect; even if the country reopens, until it abandons its “Covid Zero” policy, it will remain vulnerable to harsh closures in response to any further outbreaks.

The effect of disrupted supply chains and macroeconomic turbulence as a consequence of the invasion and sanctions against Russia is not uniform across economies. Emerging economies are clearly more vulnerable to these effects. This is particularly true for importers of energy and food. Russia is a key player in energy, fertiliser and metals supply; and both Russia and Ukraine are major exporters of food stuff, including food grain and cooking oil. Emerging economies are also more exposed to the generalised increase in inflation; to the increasing relative value of the US dollar; and to capital flight.

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India is no exception to this general rule. The invasion represents an unexpected and undesirable shock to an already fragile recovery.

Some have sought for silver linings, or ways to moderate the negative impact of the invasion. Early on there were hopes, for example, that the sharp increase in global food grain prices might help India offload some of the mountain of grain stored in the warehouses of the Food Corporation of India. The prime minister even promised to use it to “feed the world”. Yet, shortly after that assurance, the government arbitrarily shut down the export of wheat. The other possible positive benefit for India that some were touting was access to Russian oil at deeply discounted rates. Indeed, Urals crude that is already seaborne might be available at a discount of as much as $30 or more a barrel. Yet, given that Brent crude can trade at above $110 a barrel these days, that means that the price for post-sanctions, discounted Urals oil is still between $70 and $85 a barrel — the same range it was in for most of 2021.
 

Illustration: Ajay Mohanty

This is hard to think of as a “benefit” of sanctions against Russia for the Indian economy, given the logistical difficulties to India in accessing oil from Russia —which are multiplied now by the unavailability of tankers because of the unavailability of marine insurance and the threat of sanctions. To minimise the price effect of this logistical pressure, India is now bargaining for a cost of under $70 a barrel at delivery. Given that Russian oil will have a ceiling in India’s import mix of 10-15 per cent, the overall impact on the cost of energy imports of the invasion is unlikely to change too much – especially since the impact of Europe’s decision to shift over time from piped Russian gas to the global LNG market is yet to hit India’s natural gas costs. Certainly, Indian refiners, such as Reliance might see increased margins if they are able to buy distressed cargoes of Russian crude and sell the refined product at a higher global price. In April, exports of diesel and petrol reached three- and five-year highs respectively.

The impact on ordinary Indians is clear. In January 2022, the last full month before the Russian invasion, food price inflation was already at over five per cent. By April, it was 8.4 per cent.

Upward pressure on food prices could have come not just from global food markets but also possible increases in domestic input costs due to the unavailability of potash from Russia and Belarus. Yet the Union fertilisers ministry appears confident that it has tied up all the imports needed for the kharif season and the government has increased fertiliser subsidy outlay for the year by another Rs 1.1 trillion in order to insulate farmers from increased prices.

The government says that the unit subsidy on diammonium phosphate has increased five-fold since 2020-21. Imported urea is sold to farmers with a massive 95 per cent discount, and the outlay on urea is highly sensitive to the spot price for natural gas. If the government is wrong about having ensured sufficient supply, then prices will rise regardless of promises. This is what happened in the second half of last year. If the government is right — the best case scenario —it will still have to pay out an open-ended amount in fertiliser subsidy.

Which naturally raises the question about the broader impact of the war and sanctions on India’s macroeconomic stability. India is comfortably situated as compared to many other emerging economies. Yet it will face, as a consequence of this war, a difficult trade-off between inflation targeting and supporting the growth recovery. This has already led the Reserve Bank of India to be behind the curve when it comes to rate increases. The combination of risk aversion and narrowing spreads with developed-world interest rates has already caused capital outflows from India. These are nowhere near the level that would cause worries about the balance of payments; but, put together with the ever-growing public borrowing requirement, it suggests India is going to be somewhat more hard up for capital in the coming years. Put together with the pile of public debt that was taken on during the pandemic, and there are severe headwinds for growth going forward.

There is no good time for global disruptions such as those set off by the Russian invasion, but this was definitely a particularly poor time for the Indian economy to face additional problems. Neither Indians nor their government asked for this turbulence, but they — like Sri Lanka, which is now in default, and Egypt, which is severely short of wheat — will have to manage it nonetheless.

This is not the first time in the past decades that turbulence and war in distant parts of the world have rendered India and Indians more vulnerable. But the India of 2022 has a very different global footprint from the India of 1991. The India of 2022 should surely have recognised by now not just that it is grievously harmed by disruptions such as the Russian decision to invade, but also that it has a far more power to address, counter, and prevent such behaviour on the global stage than it had three decades ago. Instead of grubbing around looking for silver linings to global economic chaos, India must ask itself why it has not chosen to speak out more forcefully against the disruptions that the Ukraine invasion has set off; why it has not sought to find or join mechanisms that penalise those that have caused it, and thereby disincentivise future disruptions. It is now a large enough player for its actions to matter, but it still behaves like a country with few stakes and less power. The India of 2022 need not meekly accept egregiously bad behaviour from other countries, when that bad behaviour is singularly responsible for the threat of inflation and low growth at home.

The writer is Head of the Economy and Growth Programme at the Observer Research Foundation, New Delhi