In Asia, India apt to be one of the worst losers from the Russia-Ukraine war

Inside a recent report, financial services company Nomura has stated that in Asia, India will probably be one of the worst losers because of the continuing Russian invasion of Ukraine. “Sustained increase in oil and food prices will probably come with an adverse effect on Asia’s economies, manifested through greater inflation, less strong current account and monetary balances, along with a squeeze on economic growth. In this scenario, India, Thailand, and also the Philippines would be the greatest losers, while Indonesia will be a relative beneficiary,” the report created by Aurodeep Nandi and Sonal Varma stated.

Given India’s internet oil importer status, experts say, it is also apt to be influenced by rising oil prices. “Rising oil costs are an adverse terms-of-trade shock for consumers and companies so we estimate every 10 percent rise in oil prices would shed ~.20pp from GDP growth,” the report stated.

Experts also believe the Russia-Ukraine crisis may have a multi-dimensional effect on the Indian economy based upon how lengthy the strain simmers. “Since Russia is a vital supplier of one’s (oil and gas) to all of those other world, the main symbol of this geopolitical unrest could be on India’s inflation and it is twin deficits,” Vivek Kumar, Economist, QuantEco Research stated.

Based on QuantEco Research, from the record perspective, a USD 10 pb rise in cost of crude includes a first order impact of roughly 20 bps rise in CPI inflation. “The actual impact is determined by second order effects along with the amount of pass-through. When the government decides to provide relief to consumers and go for Rs 5 decline in excise duty on gas and diesel, this could partly curb the upside to CPI inflation by 8-10 bps. However, the annualized cost of doing this could set the exchequer back by Rs 575 bn,” he adds.

The general effect on inflation could run beyond fuel products as Russia and Ukraine come up with are essential supply of sunflower oil, fertilizers, and palladium for India.

“While importers could run lower inventories within the short-term, persistence from the crisis can lead to greater prices during these products within the medium term. The bottom line is, the Russia-Ukraine crisis if persists for lengthy, can help to eliminate India’s fiscal buffers, increase INR’s sensitivity to global volatility, keep inflation risks elevated, and prompt the RBI for continuing to move forward on financial policy normalisation,” he stated.

The study company also highlights that some minor adverse effect on exports (mainly electrical machinery, chemicals including pharmaceuticals, and iron & steel) may also be expected due to uncertainty around the order front.

“If current prices persist, then India’s current account deficit may potentially jump from 1.5 percent of GDP in FY22 to two.5 percent in FY23. This can also get ramifications for portfolio investors, who’d up their caution levels as pressure on deficit increases within an atmosphere of rising global rates of interest,” it stated.