Dark cloud over economy again

India is staring at a nearly 10% hike in petrol and diesel prices once the assembly elections in five states are over. If the government tries to offset the hike by cutting down excise duty, the impact may be lesser by two to three percentage points. But analysts say the rise in cooking gas prices will be steeper. The global crude oil prices, which had already been impacted due to Covid-19 waves may get worse if the Russia-Ukraine crisis deepens. Earlier this week, Brent crude breached the $115 per barrel mark. This is hugely negative for India, which is a net importer of crude oil and ships over 85% of its supplies from oil producers across the world. This makes India vulnerable to fluctuation in oil prices that has been exacerbated by the crisis.

That is about the transport fuel prices, the rise of which makes almost everything that is transported, consumed or sold costlier. India does not buy more than 2% of its crude oil requirement from Russia. If the crisis escalates in case of sanctions by the United States and its allies and retaliation by Russia, global supplies will be disrupted and prices could jack up for all consumers. Russia accounts for 4.7 million barrels per day (MBPD) of crude oil exports and 3 MBPD of petroleum products largely across diesel, heavy naphtha and vacuum gas oil.

According to a Kotak Institutional Equities report, even before sanctions on Russian energy exports, for the time being, the enablers of oil exports—banks, tanker companies, insurance firms and oil majors have restricted operations in the country’s oil exports which have made it significantly difficult to place barrels.

The Asian and the EU refiners are scrambling to source incremental barrels from the Middle East and other regions to offset the loss of Russian supplies. Industry journals indicate Russians Ural crude oil grade was offered for a record discount of $19 a barrel, but still got no bidders, which is the latest indication that the country’s oil exports are grinding to a halt.

Heavily dependent

In an economy like India, which is so heavily dependent on the import of crude oil, the entire macro-economic calculations can go haywire and put economic growth prospects at risk. The Budget has forecast the financial year 2022-23 economic growth at 8-8.5%, assuming the crude oil prices at $75 per barrel. That looks remote. Spot Brent crude prices have risen 13% in a day to $125 bbl on March 3. A $10 per barrel increase in crude oil prices reduces economic growth by up to 0.3 percentage points, raises inflation by 1.7 percentage points and increases the current account deficit by 0.5 percentage points, according to the finance ministry’s calculations.

According to Ajay Kedia, commodity expert and director of Kedia Commodities, if the Russia-Ukraine crisis persists, crude oil prices could cross $150 per barrel. If that happens, petrol and diesel prices could see Rs 25-30 per litre increase. But that is not all. India is also heavily dependent on the import of crude edible oil. A flare-up in international edible oil prices even before the Russia-Ukraine war and supply disruptions had affected Indian households and FMCG companies that depend on edible oil for their product for a long time. Now, it is expected to only intensify. India consumes about 3 million tonnes of sunflower oil every year and sources about 70% from Ukraine. Raising palm oil imports from countries like Indonesia is one option for India to replace sunflower oil, which could be in short supply, if the crisis lingers. India is in talks with Indonesia for an increased supply of palm oil.

The ongoing crisis may impact certain other high-frequency indicators such as financial markets and exchange rates but State Bank of India economists said at this moment they could not see any lasting impact. India runs a trade deficit with Russia. The exports to Russia have already been on a decline. In 2022, only 2.8% of India’s total imports have come from Russia so far. Trade with Ukraine is further at a lower level, according to the SBI’s Group chief economist Soumya Kanti Ghosh, who argued that a direct impact through trade channels would be limited. But rising oil prices – both transport and edible oil – can elevate inflation which in turn can lead to hardening of interest rates by the Reserve Bank of India and slow the process of economic recovery.

On the positive side, India’s wheat exports stand to gain with supply disruptions through the Black Sea route by globe’s two leading producers Russia and Ukraine. Also, as an alternative supplier of steel, aluminium and foodgrain, India’s exports will likely gain from the sanctions imposed on Russia, says the ICICI Securities. India produces more steel and aluminium than Russia and has ample stockpiles of wheat. According to the Rating Agency ICRA, some sectors like oil and gas and both ferrous and non-ferrous metals can gain through this trend, while the ones, which depend on oil as a key input, like chemicals, fertilisers, gas utilities, refining and marketing, will have a negative impact.

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