One year to the Russia-Ukraine War: Effects on the Indian Economy | BDBIPL

 

As 2023 begins, the world is still dealing with the 3 Cs (covid, conflict and climate) a set of risks
that feel both wholly new and eerily familiar. These concerns feel both entirely new and uncannily familiar. With the threat of these “older” risks—inflation, cost-of-living crises, trade wars, capital outflows from emerging markets, widespread social unrest, geopolitical conflict, and the spectre of nuclear war and constant climate changes.

The war between Russia and Ukraine has already lasted a full year. Since then, both sides have been actively waging a full-fledged war against one another a number of infrastructures have been destroyed, the war is still raging. But the ongoing Russia-Ukraine conflict has sent numerous shocks to the global economy, including that of India.

A year ago, following Russia’s invasion of Ukraine, there were concerns that the Indian economy would face increased uncertainty in at least three particular areas.

1. Increased inflation risks would provide additional difficulties for those in charge of overseeing India’s monetary policy.
2. The government’s fiscal consolidation plan would be in jeopardy if commodity prices increased, especially those of crude oil and fertilizers.
3.  The external sector of the Indian economy would be under pressure due to an increase in import costs, while exports may suffer as a result of a potential slowdown in the world economy.

The war’s severe trade interruptions, spikes in food and fuel prices, and overall weakening of
the world economy are all factors in the rising inflation and accompanying tightening of financial
conditions worldwide. Conflict and a shift in geopolitics have created a new global alignment
that is upending the global economy, including India’s.

How did India handle the conflict between Russia and Ukraine?

The conflict in Ukraine will likely be the least anticipated of the economic surprises India is going
to encounter in 2023. There are no signs of a resolution, and it has been difficult to foresee how it would affect the different sections of the Economy.

India is in the incredibly fortunate position of almost surpassing China as the most populous nation on earth. Although far more drastic reforms would be necessary, its demographics indicate that it has the ability to grow at a rate closer to 8% annually over the next ten years.

There have been two direct effects for India and another, equally significant indirect effect that is it pushed up our import bill for both energy and fertilizers. Both these (and the rising price of wheat globally) have also contributed to rising inflation globally, promoting Indian policymakers to raise interest rates in tandem with the rise in global rates resulting in Higher inflation and lower growth for India in the initial phases of the conflict. The situation now has however come to a changing point for India with the changed policy and economic condition.

1. Domestic Equity Markets – The benchmark Sensex on the BSE lost 2,700 points and the Nifty50 on the NSE fell 815 points after Russia announced its military activities in Ukraine. The Sensex saw its steepest fall on February 24, 2022, since the Covid pandemic began in March 2020. That was also the fourth-worst fall in the index’s history. Sensex and Nifty fell to their 52-week low last year in June, due to rising concerns over the conflict and its impact on inflation, and the economy. Sensex touched a low of 51,360.42 on June 16 last year, while Nifty tumbled to 15,293.50. However, markets have also scaled new peaks over the past year. On November 30, Sensex crossed the 63,000 mark, and the Nifty breached 18,758 points, for the first time ever. The Index is not significantly impacted because of government policies and international support for the Indian market, even though recent stock market changes have caused instability.
2. India’s inflation and RBI’s rate hike – India’s GDP numbers have also been affected due to the ongoing conflict. According to experts, inflation will be a persistent issue for a while and the economy has been tackling a surge in prices for a while now. The conflict in Ukraine had a number of significant effects, one of which was the effort to keep domestic prices of important commodities in check, which widened demand-supply imbalances. The Russia-Ukraine conflict has crippled the global supply chain, triggering a global food shortage, and subsequently resulting in high inflation rates in countries. Retail inflation in India reached an 8-year high of 7.79% in April 2022, two months after Russia invaded Ukraine, and remained above the Reserve Bank of India’s (RBI) tolerance level of 2-6%. This was mostly fueled by the enormous rise in crude oil prices around the world, which exceeded $139 per barrel as a result of supply chain difficulties and numerous sanctions on Russia. Financial institutions have forecast that this year will see a slowdown in global economic development as inflation rates continue to rise in many countries. Yet analysts predict that India will continue to be a “bright
   spot.” India is anticipated to grow 6.8% in FY23 as a result of digitalization, cautious fiscal policies, and large finance for capital investments announced in the Budget this year. Russian oil imports into India have significantly increased during the past few months. It has insisted that it has a fundamental responsibility to ensure that Indian consumers have the best possible access to international markets under the most favorable conditions.
3. India’s crude imports – India’s decision to increase crude oil trade and economic engagements with Russia would have huge diplomatic and economic repercussions. It is significant to remember that India mainly relies on imports to meet its needs for oil. Over 5 million barrels of the nation’s daily average need for crude oil—or about 85%—are imported. In February 2023, India’s imports of crude oil from Russia reached a record high of 1.6 million barrels per day, surpassing the sum of imports from its two main suppliers, Iraq and Saudi Arabia. For a sixth consecutive month, Russia maintained its position as the sole major supplier of crude oil, which is refined into gasoline and diesel. Russia provided more than one-third of all the oil that India bought. Prior to the start of the Russia-Ukraine conflict in February 2022, Russia had a market share of less than 1% of India’s imports; when the conflict began, that percentage increased to 1.62 million barrels per day.
4. Impact on exports – In its monthly economic report, the ministry of finance highlighted that the country’s major export markets are anticipated to experience steep declines in 2023, which could result in lack lustre growth for India’s exports this year. The volume and value of trade are likely to continue to drop in 2023 as a result of slowing global output, which caused a decline in global trade growth in 2022. The slowdown in international trade, particularly from the US and two of India’s top export destinations, may have a big effect on the country’s exports as well. Lower demand for Indian goods would result from a slowdown in their economy. India’s exports have grown significantly in the last few years due to robust manufacturing across a number of industries and supportive policy conditions. India’s merchandise exports soared to a new high of US$417.81 billion in the fiscal year (FY) 2022, above the government’s target of US $400 billion. According to government projections, India will reach its US$450 billion export goal in FY 2023.
5. India’s currency devalued – The rupee has declined against the US dollar by over 800 paise (9.8%) in the year since Russia invaded Ukraine. The depreciation has been almost 11% lower overall in 2022 than it was in all of 2013. The external industry has demonstrated resilience on numerous fronts despite the downturn being the most severe since the taper tantrums of 2013. The Reserve Bank had to repeatedly draw from its reserves as a result of the currency market’s volatility, which was brought on by a rise in world oil prices after Russia’s invasion of Ukraine, making it difficult for policymakers to address imported inflation.
6. Russia became India’s 5th largest trade partner – During the period of April through
   December 2022, according to data from the ministry of commerce, Russia became India’s fifth-largest trading partner. Russia moved up the list of India’s top commercial partners this was because of an increase in oil imports, from position 25. China and Russia are the only two of India’s top five trading partners whose shipments declined in the first half of the year, despite a 17% increase in overall exports. Despite pressure from the US and other nations to limit imports after the start of the conflict in Ukraine, the government has allowed oil corporations to acquire additional petroleum from Russia, which in October became the largest supply of crude for India.

BDBIPL, a prominent engineering products company, recognizes the significance of partnering with a strategy consulting company in India to fuel its growth and expansion plans. By engaging a reputable consulting firm with a deep understanding of the Indian market landscape, BDBIPL can tap into expert guidance and strategic insights. This collaboration enables BDBIPL to refine its business strategies, explore new market opportunities, optimize its operations, and effectively navigate the complexities of the Indian business environment. Leveraging the consulting company's expertise, BDBIPL can make data-driven decisions, strengthen its competitive position, and achieve sustainable growth in the ever-evolving Indian market.