Economic Costs Of War
Roiled by the Russia-Ukraine war, the global economy is again on a cliff edge. Having barely recovered from the debilitating effects of a two-year-long pandemic, the conflict in Europe threatens nascent economic recovery. In the United States inflation has reached a decades-high 7.9 per cent. Crude oil prices are rising, throwing India’s fiscal math into disarray.
The ONGC’s performance remains below par. Reliance Industries and British Petroleum too have had little luck in striking large oil and gas fields. Cairn Oil and Gas, a Vedanta Group company, has earmarked an investment of $4 billion (Rs 31,000 crore) over the next three years to triple its production to 0.5 million barrels a day (roughly 10 per cent of India’s requirement).
For India, the price of crude oil is vital. In the 1970s, India’s dependence on oil imports was 60 per cent. Today it is 85 per cent. The failure of India’s oil exploration policy over the last 20 years is a cross the economy has now to bear. And yet all is not doom and gloom. The Indian economy has weathered the third wave of Covid-19. The Index of Industrial Production (IIP) is above pre-Covid levels. In January 2022 it rose 1.3 per cent over the previous month.
Michael Patra, deputy governor of the Reserve Bank of India (RBI), is sanguine about inflation which he believes will remain under control with the consumer price index (CPI) steady at around six per cent despite rising food prices. Patra, however, implied that the RBI could, at its next meeting, raise interest rates to damp down inflationary pressure.
Delivering the keynote address at the IMC Chamber of Commerce and Industry, Patra said: “For India, direct trade and finance exposures in the context of the ongoing conflict are limited. The contagion could, however, impact India through a broader fallout on EMs (emerging markets) as an asset class. If worry were to give way to panic, liquidity, especially US dollar funding, could dry up and markets could malfunction. With crude oil still above $100 per barrel, new macroeconomic headwinds could be a second channel of contagion.”
While punitive sanctions on Russia by the United States-led West have not yet affected India’s trade, the longer they remain in force, the greater the danger of contagion for the Indian economy. India is exploring options to circumvent the sanctions by paying for Russian crude in rupees and enhancing rupee-rouble trade in other sectors. With the rouble crashing by 40 per cent against a basket of international currencies, this could prove beneficial to India. Moscow has also offered a 20-25 per cent discount on the benchmark Brent price of crude.
China and the Arab world have largely ignored Western sanctions on Russia. India has a legacy relationship with Russia, especially in defence equipment, as well as an expanding economic and security partnership with the US. Reconciling this triangular arrangement is a diplomatic challenge.
India has abstained on three US-backed United Nations resolutions condemning Russia’s invasion of Ukraine. Washington is not pleased but understands India’s predicament. Besides, the US needs India as a counterweight to China in the Indo-Pacific. The US companies too need India’s large consumer market – the largest in the free world and the second largest overall after China. With an estimated 500 million middle-class Indian consumers by 2030, India’s consumer market will be more than double America’s and significantly larger than that of the entire 27-country European Union (EU).
What then are the prospects for the Indian economy as the beginning of the new financial year, 2022-23, bears down on us? Buoyed by the BJP’s victory in four of the five states that went to the polls this spring, Prime Minister Narendra Modi is likely to double down on pending economic reforms. Last year proved a setback for reforms. The repeal of the three farm laws under pressure from a small but powerful lobby of landed farmer-politicians and arhityas (middlemen) was politically expedient but economically ruinous. Fortunately, since agriculture is both a state and central subject, several states have quietly begun implementing agricultural reforms that virtually mimic the three repealed farm laws.
As the prime minister’s second term enters its final two years, the government will adopt a two-pronged strategy. It will reinforce welfare benefits that contributed to the BJP’s success in the recent assembly elections while focusing on four key development areas.
First, infrastructure: airports, highways, housing and power. The emphasis is on building green energy and modernising India’s civic infrastructure. Second, private investment: the Production Linked Incentive (PLI) scheme has drawn an outstanding response from leading Indian and foreign companies. This scheme will be greatly expanded over the next two years, transforming India into an export hub.
Third, privatisation and divestment: these will receive new impetus. The Ukraine-Russian conflict has delayed the mega Life Insurance Corporation (LIC) public issue. Nonetheles, it heralds a new approach to divestment. Bharat Petroleum Corporation Limited (BPCL) is next on the block. The government holds 52.98 per cent of BPCL’s equity. Selling a large portion of this equity will result in privatisation with the government retaining only a small minority stake. Bharat Petroleum is India’s second largest fuel retailer with excellent legacy assets.
Fourth, Indian startups: they will be encouraged to set up centres of innovation in artificial intelligence, deep machine learning, web 3.0, blockchain technology, space science and fintech. The success of India’s UPI (unified payments interface), now accepted as a gateway by more than ten countries, has raised India’s profile from being a mere IT services provider to a nation at the top of the innovation value chain.
All these initiatives will help India’s economy recover faster from the double whammy of the Covid-19 pandemic and the Russia-Ukraine war. As Union Commerce and Industry Minister Piyush Goyal said at a recent Economic Times Global Business Summit (GBS): “We have strong fundaments in the economy today, the highest ever FDI (foreign direct investment), breaking records year after year. Our merchandise exports are set to cross $400 billion this year. We are over $375 billion already. Our GST (Goods and Services Tax) collections have been robust despite the third wave of the Covid pandemic and our startup ecosystem continues to grow by leaps and bounds.”
