Ukraine and Russia are two countries that border each other in Eastern Europe. On February 24, 2022, Russia sent its army into Ukraine and began trying to take over the country by force.
This invasion surprised many people, as it was the first major war in Europe for decades. But Russia and Ukraine have had a difficult relationship for centuries.
As the Ukraine-Russia conflict intensifies, it may have an impact on Indian economy’s growth. The economic sanctions imposed on Russia will impact Indian companies. Defence, tea exports, steel, coal, pharmaceuticals, fertilizer, Fuel, cooking gas, sunflower oil, automobiles, petroleum products, gold, precious stones and metals sectors are set to become expensive in days to come.
Impact of Russia – Ukraine conflict on India
1. Sharp Rise in Crude Oil Prices:
Russia is the third-largest exporter of crude oil globally. With the Russian invasion of Ukraine, the Crude oil prices are now hovering at around a 7-year high, with Brent oil prices surging above $100 a barrel for the first time since 2014. As India imports more than 85 per cent of crude oil, higher crude oil prices will cause rise in fuel & gas prices which will keep Customer Price Index (CPI) inflation higher for longer, obliging the RBI to raise rates.
2. Impact on Edible Oil:
Ukraine and Russia are the major suppliers of sunflower oil. Between November 2020 and October 2021, India imported a total of 18.93 lakh tonnes of crude sunflower oil, of this Ukraine exported 13.97 lakh tonnes and Russia exported 2.22 lakh tonnes of sunflower oil to India. With the ongoing Russia-Ukraine crisis, the demand and supply chain of sunflower oil has been impacted. Thus, increased prices of edible oils. As a result, edible oil companies are now looking at options to import edible oil from other countries.
3. Rupee depreciation:
The higher inflation and higher crude oil prices will also put pressure on the Indian currency. In case the US Fed increases the interest rates the rate differential between the US and India is expected to narrow. This can lead to capital outflows from India, leading to further depreciation. At least for the next couple of days, all depends on the evolving geopolitical situation, with all other economic factors taking a backseat.
4. Payment Issue:
The payment issue has raised concerns for those dealing with Russia. As part of the sanctions imposed by the US and EU, most Russian have been blocked from the SWIFT payment system. SWIFT is a payment network that ensures quick cross – border payments globally. With the blocking of the Russian banks from the payments network, it will be difficult for Indian traders to make/receive payments from their Russian counterparts. At the government level, India can enter into a rupee-rouble agreement, but for the private players, receiving roubles for exports may not be that attractive.
5. Impact on Import of Defence equipment:
India depends on imports for critical defence equipment. It will face difficulty in procuring defence equipment already contracted since both the rich countries and the Russians will delay deliveries, given their own requirements.
6. Impact on automobile industry:
Russia and Ukraine are major suppliers of key components of the chip-making industry. According to a report by Moody Analytics, while Russia supplies the semiconductor industry with important metals such as palladium, Ukraine supplies special gases such as Neon and Helium which are required for chip making. Even before the war began, the global semiconductor industry was witnessing a slump. In India, the automobile makers registered a drop in sales amid the chip shortage. A delayed supply of important raw materials would mean delayed and reduced production of targeted automobiles. On other side, the prices of steel and aluminium are also rising due to this conflict, thus impacting the manufacturing and production cost of automobiles.
7. Agriculture Sector
The Russia-Ukraine region is one of the major exporters for some of the key agricultural products globally. The region makes up more than 30 per cent of global trade in wheat, 32 per cent for barley, 17 per cent for corn, and more than 50 per cent for sunflower oils, seeds, and meals, according to Reuters. As the tension between Russia and Ukraine escalates, it has impacted the supply chain of these products. The European Union has already warned that the impact of the Russia-Ukraine war will be painful for the agri-food sector. Indian agriculture exports can sustain growth momentum as supply from Ukraine and Russia gets disrupted. Our granaries are filled with three times more stock than mandatorily required.
The Finance Nirmala Sitharaman said Russia and Ukraine export 30 per cent of wheat which has been stopped after the war began, however, Indian farmers are producing wheat in large quantities. “We have to take up the challenge with a global dimension. We will achieve ‘atma nirbharta’ and fulfill demands of the world in terms of providing wheat,” she said.
To conclude, India’s impact on the current crisis may not be direct, the effects of the crisis could still impact the country’s economic growth. As per various media reports, Russia is the 25th trade partner for India (in terms of exports value in 2022). With sanctions imposed by multiple countries, India’s exports could get affected. These mainly include tea, mobile phones and pharmaceuticals. Similarly, India imports crude oil, coal and diamonds from Russia. It could disrupt the supply for the country temporarily and we can see rise in price due to inflation caused by this crisis.