Explained: India’s inflation concerns over Russia-Ukraine war

Russia Ukraine news: The Ukraine invasion could lead to rising oil prices, which could further pose a risk to India's rising inflation and impact current account deficit.

Tanks move into the city, after Russian President Vladimir Putin authorized a military operation in eastern Ukraine, in Mariupol, February 24, 2022. (Reuters Photo: Carlos Barria)

The Russia-Ukraine war could lead to rising oil prices, further posing risk to India’s rising inflation. India imports more than 80 per cent of its oil requirement, but the share of oil imports in its total imports is around 25 per cent. Rising oil prices will also impact the current account deficit — the difference between the values of goods and services imported and exported.

More importantly, for the NDA government, the surge intensifies the pressure on the state-owned oil retailers to hike retail prices. These hikes have been put on hold in the wake of the state elections and an increase is expected immediately after the polling is over. A calibration of the hike is now a more complex task, given the cascading inflation impact that could follow in the wake of the anticipated rise in prices.

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Inflation concerns

Brent crude prices hit $96.7 per barrel on Tuesday, the highest mark since September 2014, after Russian President Vladimir Putin deployed troops to Donetsk and Luhansk in Ukraine. The rising global tensions and threat of invasion in Ukraine have caused oil prices to surge.

The rise in crude prices poses inflationary, fiscal, and external sector risks. Inflation could turn even more structural with high oil prices having a pass-through effect for other sectors.

Crude oil-related products have a direct share of over 9 per cent in the WPI basket and, according to a report by Bank of Baroda chief economist Madan Sabnavis, a 10 per cent increase in crude would lead to an increase of around 0.9 per cent in WPI inflation.

“Our baseline forecast for WPI is 11.5-12 per cent for FY22 and 6 per cent in FY23, which might increase by around ~0.9-1 per cent because of increase in crude prices,” says the report.

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“In FY22, the share of oil imports in India’s total imports increased to 25.8 per cent (Apr-Dec’21) as oil prices inched up. With oil prices on an uptrend again, the oil import bill is likely to swell further. This will have an impact on India’s external position. We estimate that a 10 per cent hike in oil prices will lead to an increase of India’s CAD by US$ 15bn or 0.4 per cent of GDP. This will have a negative impact on INR,” Sabnavis said in his report.

“If sanctions take about 60 per cent of this off global markets (with China, Belarus, and a few other customers possibly defying the sanctions), world crude-oil supply would decline by 3mmbd, and the Brent crude price would likely shoot above $110/bbl. However, even with the possible restoration of Iran as a major crude oil exporter, Brent would likely remain above $100/bbl for much of 2022,” ICICI Securities said in a note.

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What has the government said so far

In Mumbai, Finance Minister Nirmala Sitharaman recently said the Russia-Ukraine tension and a surge in crude oil prices posed risk to the financial stability of the country.

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Increasing fuel prices is expected to hit consumption directly, already affected by the impact of the pandemic. Government estimates have estimated the private final consumption expenditure (PFCE) for 2021-22 at Rs 80.81 lakh crore, down from Rs 83.22 lakh crore in 2019-20.

India’s retail inflation had hit a seven-month high of 6.01 per cent in January, breaching the Reserve Bank of India-set upper tolerance level The spike was mainly because of high food inflation, which hit a 14-month high of 5.43 per cent, along with a high base.

Though wholesale price inflation in January softened to 12.96 per cent from 13.56 per cent a month ago, it was the tenth consecutive month of being in double digits.

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Aanchal Magazine

Aanchal Magazine is a Senior Assistant Editor with The Indian Express, serving as a leading voice on the macroeconomy and fiscal policy. With over 13 years of newsroom experience, she is recognized for her ability to decode complex economic data and government policy for a wider audience. Expertise & Focus Areas: Magazine’s reporting is rooted in "fiscal arithmetic" and economic science. Her work provides critical insights into the financial health of the nation, focusing on: Macroeconomic Policy: Detailed tracking of GDP growth, inflation trends, and central bank policy actions. Fiscal Metrics: Analysis of taxation, revenue collection, and government spending. Labour & Society: Reporting on labour trends and the intersection of economic policy with employment. Her expertise lies in interpreting high-frequency economic indicators to explain the broader trajectory of the Indian economy. Personal Interests: Beyond the world of finance and statistics, Aanchal maintains a deep personal interest in the history of her homeland, Kashmir. In her spare time, she reads extensively about the region's culture and traditions and works to map the complex journeys of displacement associated with it. Find all stories by Aanchal Magazine here ... Read More