Russia-Ukraine Crisis Might Upset Oil Prices and Fiscal Deficit

Russia – Ukraine War and it’s impact

A 10 per cent rise in crude oil prices could lower India’s GDP growth by 0.2 percentage points; on the retail inflation front, the impact is between 0.5 and 0.6 per cent. 

The ongoing Russia-Ukraine conflict is already having its impact on the global energy supply and prices. Brent Crude hit USD 105 on very first day of the clashes. This was the highest since 2014. Experts are of the view that crude oil touching between USD 120 and 130 cannot be ruled out if the situation deteriorates further.

Russia accounts for 12 per cent of the global crude oil production and is the third largest producer of oil in the world and the second biggest exporter in the world. It is also among the leading producers of natural gas. And, sanctions on Russia’s energy will cause a collateral damage on Russia and the rest of the world.

According to a Reuters report, Goldman Sachs bank has raised its one-month Brent Crude price forecast to USD 115 a barrel from USD 95 previously. Meanwhile the Bank of America estimates the oil price to test USD 130 while Citi pegs it around USD 120.

Until a month back we were talking about oil not exceeding beyond USD 95-100 in the worst case scenario and here we are now.

The danger of prices hitting the roof are now lurking as the inventories are down amid the growing demand.

After some softening in the crude oil prices over the weekend, the prices again moved northward on Monday and it hit USD 100 per barrel mark. Intraday, oil prices jumped more than USD 7 in early trade after Russian President Vladimir Putin put the country’s nuclear deterrent on high alert.

Europe initially refrained from any meaningful sanctions against Russia especially in the energy sector as over 30 per cent of its natural gas requirement is met by Russia. The unwillingness was due to the need for unrestricted gas supply to keep things running in Europe. That could change now as the support for Ukraine is only growing. 

If that happens, we are staring at a major escalation in prices of crude oil and other commodities.

Both, Russia and Ukraine also play an important role in the global supply chain of several industrial metals like copper, nickel, aluminium and iron. Russia is also among the leading producers of palladium and platinum. It is also the largest exporter of coal.

The conflict will also likely have a considerable impact on edibles like oil, wheat and other grains. 

The commodities will be severely hit escalating prices and triggering global inflation further if a common ground is not found between the two warring nation.

India is closely watching the developments as its own recovery will be hinging on the situation and how it unfolds going ahead.

What is at stake for India?  

The ongoing crisis can affect Indian economic recovery if the situation prolongs. It could also potentially widen the country’s fiscal deficit.  

India meets nearly 80 per cent of its oil requirements through imports and any appreciation in prices will widen its fiscal deficit. The crisis could further lend strength to the US Dollar against other currencies including the Indian Rupee. Soaring oil prices and a weaker rupee could unsettle its finances in a very significant way.

While, the government can pass some of the cost to the consumers, it would be an additional burden for the common man.

The prices have remained steady since November 3, 2021, when the Centre went for the biggest excise duty cut ever to cool off prices from their record highs, reducing the duty on petrol by Rs 5 and on diesel by Rs 10. Prior to this, the price of petrol had crossed Rs 100 in most major Indian cities while that of diesel had hovered around the century mark too. 

A 10 per cent rise in crude oil prices could lower India’s Gross Domestic Product (GDP) growth by 0.2 percentage points, a Reuters report said quoting a Nomura research note.

Another media report brings out an interesting research which said that every 1 USD rise in crude oil prices has a 0.3 per cent on INR. On the Consumer Price Inflation (CPI) or retail inflation front, the impact is between 0.5 and 0.6 per cent. 

The fuel price hike has a cascading impact on the economy with no conceivable life aspect remaining untouched – from transportation to food to construction or any industrial activity. 

The crisis is also likely to impact edible oil prices, especially sunflower oil imports. According to a media report, India imported edible oils worth Rs 1.17 lakh crore in 2020-21 during the marketing year (November to October) and the surge was a record high. The import was nearly worth Rs 72,000 crore in the previous year.  

In terms of volume, the imports were around 130 lakh tonne. India imports 25 lakh tonne of sunflower oil annually, of which 70 per cent comes from Ukraine, 20 per cent from Russia and 10 per cent from Argentina, this report said.

Hopefully, the present crisis resolves early, bringing a sigh of relief to people across the globe.

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