Unexpected, but also unacceptable – Shocks due to Russia-Ukraine war

News: Russian invasion of Ukraine represents an unexpected and undesirable shock to global economies, including India’s Economy.

Indian economy is facing some unexpected shocks due to the Russian invasion of Ukraine. Even the areas which were looking beneficial for India are turning out to be harmful.

Impacts on Indian economy

Both Russia and Ukraine have been major exporters of foodstuff, including food grain and cooking oil. Russia alone was a key supplier of energy, fertilizer, and metals. However, the following are some unexpected shocks to the Indian economy:

Food grains: India was expecting to take benefit from a sharp increase in global food grain prices by supplying its excess stocks stored with FCI. However, the government’s recent decision to shut down the export of wheat has reversed the expectation.

Energy: India was expecting discounted supplies of Ural oil from Russia. However, the price is at the same level, as it was in 2021 i.e. around $30 less than Brent Crude. Furthermore, India is facing logistical difficulties to India in accessing oil from Russia. The unavailability of tankers due to the unavailability of marine insurance and the threat of sanctions is a major hurdle.

Food Prices: Food supplies are under pressure due to increase in price in the global food market and increases in domestic input costs due to the unavailability of potash from Russia and Belarus.

Fiscal pressure: the government has increased fertilizer subsidy outlay for the year to insulate farmers from increased prices.

Monetary policy dilemma: RBI is facing a dilemma between supporting inflation targeting and supporting the growth recovery.

Present India is much more powerful and effective as compared to 1991 India. Thus, India should be more aggressive in speaking against the disruptions caused by global events like the Ukraine invasion.

States must follow Centre’s fuel tax cuts

Source: Published in Times of India on 23^rd May 2022.

News: Government has announced lowering excise duties on petrol and diesel, as well as offering a subsidy for LPG cylinders.

States must also reduce the taxes on oil. The combined impact of tax cuts will provide much-needed relief to stressed household budgets and small business balance sheets.

Because, unlike previous inflationary pressure, that took place along with high economic growth, this time, it has arrived in the backdrop of five years of economic weakness and a pandemic shock.

How has increasing inflation helped the government?

A sharp rise in inflation has helped central governments in two ways:

1.) First, buoyant tax collections. GoI’s net tax revenue between April 2021 and February 2022 was almost Rs 3.75 lakh crore higher than what was collected two years ago in a pre-pandemic year.

2.) Second, growth of nominal GDP has outpaced liability of interest on government borrowings.

Similarly, state governments have also benefitted from inflation. The ratio of fiscal deficit to state domestic product in 2022-23 is lower than the cap fixed by GoI for many states.

Source: This post is created based on the article “Unexpected, but also unacceptable” published in Business Standard on 23^rd May 2022.