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How a bullet from Ukraine burnt a hole in India’s pocket

100 days on, the war's impact on price rise in India has been near total


A gun powder-coated butterfly effect, if you will. As guns and tanks blazed across the steppes on February 24 when Russia invaded Ukraine, it seared a deadly hole through the pockets of the average Indian. 100 days into the war in Ukraine, its impact on India, just like most parts of a globally connected economy, is near total.

In those 100 days, a disquiet spring when the country was just about getting to stand on its feet after the Omicron wave has turned into a scorching summer of discontent. From basmati to biscuits and from flight tickets to fashion, price rise seems to have turned into the straw that finally broke the camel’s back. Even a duty cut that brought fuel prices down by nearly Rs10 has not been able to salvage, yet.

“The Ukraine war has a short to medium-term dampening effect on the Indian economy, both in the real and financial sectors”, said Anusree Paul, Associate Professor at BML Munjal University’s School of Management. “The magnitude has been amplified further due to the co-existence of the ongoing pandemic.”

Ironically enough, the beginning of the war seemed to augur well for the Indian economy. India’s exports have been rising over the past few months and the improved forex rates seemed like a bonanza ( Dollar’s value against the rupee increased from Rs 74.6 the day war started to Rs 77.5 as of today). Sanctioned by the West, Russia was desperately offering oil at a discount, and it seemed India’s wheat surplus could reap a windfall by stepping into the vacuum left by cessation of exports by the two warring countries, who were the world’s leading producers of the food grain.

But the best-laid plans got a rude jolt in reality — that cheaper oil is yet to materialise; except for a couple of private oil retailers who managed to order some. Oil from Russia anyway constitutes a minuscule percentage of India’s oil basket, which is primarily fulfilled from the nearer Persian Gulf countries.

As for wheat, all those dreams of an export bonanza lay shattered after three months, as a hotter-than-ever summer devastated local crop yields. And as unscrupulous exporters started diverting domestic supplies towards the export market, a government wary of what this would eventually mean for domestic consumption was forced to step in and order an export ban. Ditto for sugar.

Not that it could do anything much about global oil prices though. On February 24, the day the war started, crude oil price was at 85 dollars a barrel. Within a few days, it peaked at 127 dollars, with the rate as of today at a still-unbearable-high of 117 dollars.

On the retail side, while the Modi government froze prices for a few months due to the crucial Uttar Pradesh Assembly elections, the hike after the polls saw petrol prices reach as high as Rs121 (in Andhra Pradesh). A benevolent excise duty cut of more than Rs.8 has not given citizens much of a breather; it remains to be seen whether it will have a domino effect in reducing all-round prices

This is because an increase in fuel prices directly translates into an increase in transportation costs for anything from food grains and vegetables to commodities and finished products. “The high crude oil price has a spillover effect on all industries, inducing cost-push-inflation close to double digits”, explained Paul. “It (has) impacted the business cycle involving businesses and government through a multiplier effect.”

On the macro level, while finance ministry is keeping a brave face over its ambitious budget plans of spending massively on infra projects to boost the economy, there are indications that expenditure may need to be cut down to meet with the new challenges of inflation, high oil import outgo and the nearly Rs.2 lakh crore govt decided to forego by the two duty cuts on fuel over the past six months.

Duty cut or not, prices continue to skyrocket, and that’s worrisome for the Modi government; as coupled with shortages and Covid-impact, it could mean all-round bad news. Inflation peaked at 7.9% in April, the highest in eight years. Anything from wheat (prices up by 15% over 2021) to sugar (5%) to lentils (masoor dal prices up by 11.6%) have shot up.

Edible oil is another area of grave concern — sunflower oil used to come from Ukraine and now costs the, er, sun. Indonesia recently banned exports of Palm Oil, while costs of vanaspati and mustard oil, favoured by large sections of ordinary Indians, have been spiralling up.

Completing the vicious cycle has been the rise in prices of anything from steel to fertilisers. This has led to increase in prices of anything from cars and bikes to even, believe it or not, match boxes.

“This has put a significant pressure on the pockets of middle and lower-income households as real income decreases in the short run,” pointed out Paul of BML. The big danger of this, and it is already happening, is that the middle and lower classes will cut down on their consumption, leading to another vicious cycle of slowdown in overall economic growth.

International rating agency Moody’s, though, believes it is not all bad news. While it agrees that soaring oil and food prices will have a large impact, it still feels India’s growth story will continue. “The global economic fallout from the Russia-Ukraine military conflict will push up inflation and interest rates in India, and create supply constraints”, Moody’s said in a note last fortnight, but added that, “several months into the conflict, fears over the impact have moderated.” Not sure the man on the streets in India will wholeheartedly agree.

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