Global stagflation risk

IMF had already reduced the global growth outlook due to the Omicron variant to 4.4%, now after the Ukraine crisis situation has become much worse.

How Russian invasion of Ukraine is affecting the global economic scenario?

Sanctions on Russia have led to a drastic fall of more than 60% in the value of the Rouble (Russian currency).

Prices of several commodities like wheat and corn, nickel, aluminum, oil, and gas have surged due to conflict. For example, the price of Brent Crude is 29% higher than before the invasion began on February 24.

An embargo on energy supplies from Russia could result in soaring electricity prices in European and other dependent countries. It is notable that Russia supplies Europe about 40% of its gas requirements, roughly a quarter of its oil and almost half its coal needs.

How would it impact India?

In a 2019 paper on ‘The Impact of Crude Price Shock on India’s Current Account Deficit, Inflation, and Fiscal Deficit’, 2 senior RBI researchers gave an idea of the impact of oil price rise.

They estimated that a $10 increase in the price of oil from a $65 level would raise headline inflation by about 49 basis points (bps) or widen the Government’s fiscal deficit if it decided to absorb the entire oil price shock.

Thus, Indian policy makers will have to make a tough choice between revenue shortfall in case they cut the fuel taxes and higher inflation plus slow economic growth i.e. stagflation.

Source: This post is created based on the article “Global stagflation risk” published in The Hindu on 9th March 2022.