Brace for higher fuel prices, inflation

Russia’s war has roiled the global economy

The Russian military action against Ukraine has sent international crude oil prices soaring, and the volatility in prices has added to the uncertainty and anxiety. Last week, the prices went beyond the multi-year high of $100 per barrel which is also a psychological level. They remain around the $100 level but are expected to go up, possibly as high as $115/barrel. Even the present levels would make matters difficult for countries like India because Russia accounts for about 10% of global crude supplies. It is also a big supplier of natural gas to Europe. Supply problems and the resulting price hikes can hit all economies that have also been weakened by the Covid pandemic. Recovery will become much more difficult. Other oil-producing countries have missed their production targets in recent weeks. The present disruption has come on top of that.

Union Finance Minister Nirmala Sitharaman has already warned of the consequences of a jump in oil prices for India. The country imports about 80% of the crude oil it needs, and the demand has been steadily increasing. The expected post-Covid recovery would also have given a big push to imports. The Economic Survey has assumed a $70-75 per barrel price for crude and the 8.5% growth projection for 2021-22 was based on that. But the jump in oil prices has the potential to render most Budget figures irrelevant. Importantly, it will fuel inflation, which is already a challenge. Retail fuel prices have been held artificially now because of the ongoing Assembly elections. They are expected to be increased after the last round of polling next week. The fuel price increase will have an overall impact on the price of all products and commodities. Commodity prices have otherwise been increasing at the global level and there is an inflationary environment in all countries. The Reserve Bank of India has prioritised economic growth over inflation these last two years. A sudden increase in inflation might make coping difficult. The current account deficit will also come under pressure and exports will be affected. Capital flows will be hit and investments will slacken further.

The conflict can affect India in other ways, too. India is dependent on other countries for its cooking oil requirements. Almost 90% of the country’s sunflower oil imports are from Russia and Ukraine. These are certain to be disrupted and prices will soar. Other edible oils have also seen an increase in prices in recent weeks for other reasons. The supply of a number of other commodities for industrial and other uses, like fertilisers, will also be affected by the conflict. This is apart from the consequences of the general impact of the conflict on global trade and financial relations.