Moneycontrol Pro Panorama | India’s trade sailing into choppy waters as war drags on

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The uncertainty from geopolitical risks is increasing. With the Russia-Ukraine conflict intensifying, more nations are being drawn into the fray and the West is having no choice but to increase sanctions on an unrelenting Russia.

India, in spite of its neutral stance, is not insulated from the economic fallout of this conflict. The flare-up in crude oil, metals and food grain prices will translate into a trade shock. The impact of high oil prices is already seen in February’s widening trade deficit. This was mainly because of weak exports and a surge in imports of oil and gold too, driven by increasing geopolitical tensions. A report by Barclays estimates that every $10/bbl increase in the price of crude oil raises India’s current account deficit by $10 billion (about 0.3 percent of GDP).

Not just oil, global commodity prices are being roiled on the back of supply disruptions, uncertainty on how demand will play out and wild speculation. Both the warring nations are among the largest producers of metals. My colleague Ravi Ananthanarayanan analyses what lies ahead for metal prices.

For now, steel, nickel, aluminium and coking coal prices have skyrocketed. The BSE Metal Index has been in a celebratory mood for the past two weeks. But one does not know how the surge in energy costs could singe the metal industry profits, or for that matter, pinch even cement industry fortunes.

Meanwhile, auto industry experts foresee semiconductor and chip supplies worsening, just when the situation was believed to be easing post the pandemic. Certainly, with retail demand still tepid, the auto sector is bound to be dented in the near to medium term by high metal and fuel prices, which are inflationary, and chip shortages.

If the geopolitical risks are prolonged, high energy prices will impact many downstream sectors negatively. R Sreeram writes about the impact of prolonged conflict on the fertiliser sector. After all, India depends entirely on imports for potash, and it imports 90 percent and 28 per cent of its phosphate and urea requirement, respectively. There could also be trouble for crude-downstream industries such as paints, chemicals and petrochemicals, which will see rising input costs.

While these are some of the immediate implications, if external risks to the economy mount, the bigger picture of rising inflation and trade deficit would turn gloomier. Adding to core sector risks, inflation is likely from agri and food products too, what with prices of wheat, rice and palm oil rising sharply since Russian invaded Ukraine.

To sum up, for India, exports could slow due to global uncertainty largely in Europe, trade deficit could widen and the oil price surge could lead to volatile capital flows and nervous equity and financial markets.

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Vatsala Kamat
Moneycontrol Pro