One year of Russia-Ukraine war: How the conflict impacted Indian economy
The Russian action in Ukraine expectedly invited widespread condemnation from the West, with several countries slapping punitive sanctions on Moscow.
Russia has over 2,700 sanctions against itself that have frozen around $300 billion of its gold and foreign exchange reserves. Besides, US and its allies embargoed Russian oil which pushed up global crude oil prices to record highs in the months that followed.
In other words, the war not only led to social outcry but also impacted almost all major economies of the world.
The spillover effect fell upon India as well. In line with global cues, stocks markets tumbled, inflation soared to record highs, rupee plunged against the US dollar, foreign exchange reserves took a hit and more.
This was the 2nd major blow — for not just India but global economy as a whole — after the onset of Covid-19 pandemic in 2020.
Interestingly, while some aspects of the slowly recovering world played out as expected, there were a few surprises as well. For India, the impact wasn’t felt as much as other major economies.
Here’s a look at how Indian economy performed since beginning of the Russia-Ukraine war:
Economic growth
One of the major impacts of the war was a slowdown in pace of economic growth, at a time when they were gradually looking to rise above the pandemic distress.
Disruption to 2 major trade routes, Russia and Ukraine, along with subsequent sanctions imposed on Russia by different economies, had a major impact on global supply chains. As a result, oil prices surged to record highs, which in turn pushed up inflation.
However, the Indian economy showed extreme resilience to such external factors and expanded by 13.5% in the first quarter of the financial year 2022-23 (April-June 2022). For the next quarter, that is, July-September 2022 GDP growth came in at 6.3%.
So, India is in a better position as compared to other global economies. Both World Bank and International Monetary Fund (IMF) have termed it to be a relatively “bright spot”.
Even though India’s pace of growth is projected to slowdown in the coming financial year, it is still being touted as the fastest among major economies.
A few days back, IMF managing director Kristalina Georgieva said India alone will contribute 15% of the global growth in 2023.
“Why is India a bright spot? Because one, the country has done really well to turn the digitalization that has been already moving quite well into a major driver of overcoming the impact of the pandemic and creating opportunities for growth and jobs,” Georgieva noted.
“Second, because India’s fiscal policy has been responsive to economic conditions. We have seen the new budget presented, and it signals the commitment to fiscal consolidation, while at the same time provides significant financing for capital investments. And three, because India didn’t shy away to learn the lessons from the pandemic and to implement very strong policies to overcome what has been really a difficult time for a number of months,” she said.
Fears of global recession
Speculations have been rife that some of the major economies of the world, especially the United States may be inching towards a recession.
The stock markets in US already had a rough 2022 and investors are now bracing themselves up for an expected recession in 2023, a report by Reuters said.
It all started with inflation surging to 40-year highs in the country in the aftermath of the war and the consequent multiple rate hikes by the Fed — something that was stalled ever since Covid pandemic happened.
The US Federal Reserve minutes released on Wednesday showed “some” participants saw an “elevated” likelihood of a recession in the United States this year, and pointed to a drop in consumer spending at the end of 2022, others noted that households continued to sit on excess savings and that some local governments had “sizeable budget surpluses” that could also help stave off a painful downturn.
Wary of being hit by recession, the US tech firms have already started laying off workers as part of their cost-cutting measures to be able to sail through tough economic conditions. Widespread layoffs have also been witnessed in finance, retail, pharma and other sectors.
Till now, Indian firms have not resorted to any such measures but have a keen eye on conditions abroad. If the biggest economy of the world falls prey to recession, the impact is sure to be felt globally.
Inflation pain persists
One of the biggest and most common impacts of the war in Ukraine was the struggle to contain domestic prices of key commodities, thereby widening the demand-supply imbalances.
In fact, global inflation has been surging since 2021. An event like the war only flared up a crisis that was waiting to happen in future.
Fueled by erratic rainfall and supply shocks from Russia’s invasion of Ukraine, prices of daily consumables like cereals and vegetables which form the largest category in the inflation basket have climbed even further since February 2022.
In April 2022, 2 months after Russia’s invasion of Ukraine, India’s retail inflation jumped to 8-year high of 7.79% and remained above the Reserve Bank of India’s (RBI) tolerance band of 2-6%. This was mainly fuelled by the massive surge in global crude oil prices that went past $139 a barrel, because of supply chain disruptions and multiple sanctions on Russia.
Inflation spiked yet again in January 2023 to 6.52%, after staying within 6% for 3 months, on higher food prices.
According to latest MPC minutes published on Wednesday, the RBI said price pressures in India remain high and it would be premature to lower the guard on inflation.
Monetary policy tightening
With inflation soaring to record highs, the RBI moved in line with US Federal Reserve and opted for an off-cycle meet of its monetary policy committee in May last year to raise its key lending rates.
Since then RBI has raised its key policy rates by 250 basis points (bps). In other words, the Russia-Ukraine war has pushed up repo rate to 3-year high.
Consistent rate hikes have led to a consequent increase in EMIs being paid by loan takers, thereby adding to the financial burden of people amid already high inflation.
The rate hikes are not expected to stop anytime soon, not just in terms of India but also for all major central banks of the world.
RBI governor Shaktikanta Das has time and again reiterated that price pressures in India continue to remain high and it would be premature to lower the guard on inflation.
“It will be premature to pause when there are no definitive signs of slowdown in inflation, particularly core inflation,” RBI executive director and MPC member Rajiv Ranjan wrote.
“Nevertheless, as the policy rate adjusted for inflation has now turned positive, albeit barely so, there is a case for paring down the pace of rate hike to the usual 25 bps,” he added.
Impact on exports
Exports are an integral part of any economy’s development.
In its monthly economic report, the ministry of finance noted that India’s exports may see tepid growth this year as the country’s major export markets are forecast to decline sharply in 2023.
Growth of global trade fell in 2022, “and is expected to be still lower in 2023 with a further decline in volume and value of trade on the back of slowing global output,” the report said.
This slowdown in global trade, especially from US and Eurozone — two of India’s largest export destinations — might have significant impact on India’s exports as well. A slowdown in their economies would imply lower demand for Indian exports.
December 2022 recorded 12% fall in exports, while imports dipped 3% to $58.2 billion, resulting in widening trade deficit. It was the fastest decline in two years, was due to global headwinds as several countries are in the midst of a slowdown as also due to the high base in December 2021, when exports of $39.3 billion were the third highest on record.
Similar pattern was observed in January 2023 where exports fell 6.58% from a year ago to $32.9 billion. Imports dropped 3.63% from a year earlier and that pushed the trade gap to the lowest in a year, fueling hopes of a significantly narrower current account deficit.
Stock market volatility
One of the common reactions to the war was a fall in investor sentiment globally. Not just India, but stock markets across the world witnessed one of their worst falls since the pandemic.
The war led to one of worst fall in BSE sensex in the last 2 years. The index crashed nearly 4,000 points in the first 20 days of war and investors witnessed massive losses.
The benchmark BSE sensex fell below 51,000 level as the war continued. Investors became jittery and opted for safe haven assets.
However, timely policy measures helped in faster recovery. From its recent low level of 50,921 on June 17, the BSE sensex witnessed an upward trajectory in almost every trading session.
However, renewed geopolitical tensions as US President visits Ukraine has spooked investors yet again. The BSE sensex has been falling for 5 straight sessions now.
India’s currency devalued
In the year since the Russian invasion of Ukraine, the rupee has weakened by almost 800 paise or 9.8% against the US dollar. In all of 2022, the depreciation has been over 11% — poorest since 2013.
Although the decline has been the sharpest since the taper tantrums of 2013, the external sector has shown resilience on many fronts.
The volatility in the forex market, prompted by a rally in global oil prices following Russia’s war in Ukraine, meant the Reserve Bank had to frequently dip into its reserves as imported inflation became a challenge for policymakers.
Since mid-October, the rupee recovered from the bouts of volatility experienced in the earlier part of the year and has been trading close to its long term trend, as per the RBI’s Financial Stability Report.
The volatility in the currency market during the year was triggered by the outbreak of the Russia-Ukraine war in February as it disrupted the global supply chains, fuelling inflation as well as inflationary expectations across the world.
A hawkish US Federal Reserve started raising rates to rein in inflation just as severe geopolitical crises besieged the global economy. It made the dollar a safe haven currency, causing huge investment outflows from other countries.
High crude oil prices in the international market too weighed on the rupee. Foreign investors pulled out a net sum of Rs 1.22 lakh crore from the Indian equity markets and over Rs 17,000 crore from the debt markets in 2022 owing to aggressive rate hike by central banks globally.
5 times jump in Russian imports
Sanctions on Russia by the US and its allies in a way proved to be beneficial for India as it bought cheap crude oil from Moscow.
As a result, India’s imports from Russia jumped about five times to $37.31 billion during April-December 2022. This was mainly on account of increased inbound shipments of crude oil.
In 2021-22, Russia was India’s 18th largest import partner, accounting for $9.86 billion of imports. In comparison, Russia became India’s 4th largest import source during the 10-month period.
From a market share of less than 1% in India’s import basket before the start of the Russia-Ukraine conflict, Russia’s share of India’s imports rose to 1.27 million barrels per day in January, taking a 28 per cent share, according to energy cargo tracker Vortexa.
India bought 33 times more oil from Russia
India, the world’s third-largest crude importer after China and the United States, has been snapping Russian oil that was available at a discount after some in the West shunned it as a means of punishing Moscow for its invasion of Ukraine.
In January 2023 as well, India’s appetite for Russian crude oil rose to unseen levels. In December 2022 India purchased an average of 1.2 million barrels a day from Russia in December.
The sharp increase in December is possibly the result of deepening discounts due to additional sanctions from the G-7 and European Union including a $60-a-barrel price cap.
India meets more than 85% of its oil demand via imports, which makes it highly vulnerable to price volatility. The state-owned refiners, who have been prevented by the government from raising pump prices of diesel and gasoline since May, have increasingly favored cheaper Russian imports.
Imports from India’s two other main suppliers also increased last month. Purchases from Iraq climbed 7% to around 886,000 barrels a day, while those from Saudi Arabia increased 12% to about 748,000 barrels a day, according to Vortexa.
Russia became India’s 5th largest trade partner
Russia emerged as India’s 5th largest trading partner during April-December 2022, data by the ministry of commerce showed.
Largely driven by surge in oil imports, Russia jumped from 25th spot in India’s top trading partners list.
In fact, among India’s top five trading partners, China and Russia are the only countries where exports have taken a beating during the first half of the year, when overall exports had grown by 17%.
The government has let oil companies buy more crude from Russia, which emerged as the biggest source for Indian crude in October, despite pressure from the US and other countries to stop imports after the war in Ukraine started in February.
Foreign minister S Jaishankar and oil minister Hardeep Puri have maintained that India will keep giving top priority to securing its interests, even as finance minister Nirmala Sitharaman has said that purchase of Russian crude has helped manage inflation.
(With inputs from agencies)
