India May Be Heading To Stagflation Due To Russia Invasion In Ukraine

 - Sakshi Post

Russia-Ukraine conflict may have an adverse impact on Indian economy

LPG gas prices likely to go up in the coming months

Petrol prices will rise by ~10%

As the European Union seems reluctant to throw Russia out of the SWIFT global interbank payments system - a massive network of more than 11,000 banks and other organisations in more than 200 countries and territories. Despite considering the sanctions against Russia for invading Ukraine, the EU leaders are still discussing the economic consequences in their countries. Whereas India is likely to get the worst hit in Asia due to the ongoing Russia-Ukraine conflict. 

Nomura, a Japanese financial service and research firm, in its recent Asia Insights report says the Russia-Ukraine conflict leads to “sustained increase in oil and food prices” which will have an adverse impact on Asia’s economies “ manifested through higher inflation, weaker current account and fiscal balances” and a squeeze on economic growth. 

According to the Japanese research report authored by Aurodeep Nandi and Sonal Varma, “India, Thailand and the Philippines could be the biggest losers, while Indonesia would be a relative beneficiary.”

As per the experts, India’s net oil importer status is also likely to be impacted by the rising oil prices. “India would be adversely impacted by rising oil prices, given its status as a net oil importer. Rising crude oil prices are a negative terms-of-trade shock for consumers and businesses, and we estimate every 10% increase in oil prices would shave off ~0.20 pp (percentage points) from GDP growth.”

Given that pump prices of petrol, diesel and LPG have been frozen since November due to the state election, the petrol prices will rise by ~10% and LPG prices by much more in the coming months.

It’s not just the fuel items that would have an overall impact on inflation as Russia and Ukraine put together are important sources of sunflower oil, fertilisers and palladium for India. Analysts feel 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. It is said, India’s current account deficit could potentially jump from 1.5 percent of GDP in FY22 to 2.5 percent in FY23. As India is one of the largest importers of oil, the Russia-Ukraine conflict will likely have its adverse impact on the Indian economy as the country remains quite vulnerable. 

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