Govt wary of Russia-Ukraine war effect on trade, inflation: Sitharaman
3 min read 28 Feb 2022, 12:55 PM ISTSitharaman said that the government was seized of the matter, acknowledging that the current geopolitical situation could impact the import of essentials such as edible oils and fertilizers
PremiumDELHI/BENGALURU : The government is worried about the impact of the war between Russia and Ukraine on India’s trade with the two countries, finance minister Nirmala Sitharaman said on Monday, adding the issue was being studied in detail.
The escalating geopolitical situation is of concern for New Delhi because trade disruptions could potentially impact supply chains and fuel inflation, which has already breached the Reserve Bank of India’s (RBI) tolerance threshold of 6% in January.
Though fuel prices have been kept unchanged by state-run oil retailers, for now, high oil prices can still stoke inflation as a host of chemicals derived from crude are key inputs for several industries such as automobiles, consumer goods and paints.
Sitharaman also expressed concern about exports of farm produce from India to Russia and Ukraine, which could affect farmers’ income in case of a disruption. Interacting with business leaders in Chennai, the finance minister acknowledged the current geopolitical situation could impact the import of essentials such as edible oils and fertilizers. India is a big importer of phosphatic fertilizers from Russia. Sitharaman said she was also worried about exports to the region.
“We are rightly worried about what comes from there, but I am more worried about what is going to happen to our exporters who are doing very well, particularly the farm sector, to Ukraine and Russia," Sitharaman said.
The minister said the government would have a comprehensive impact assessment on major exports from India, including payments for shipments already made to the region.
“But you can be assured that we are fairly seized of the matter in its granular form because it is going to have an impact on essentials such as edible oils that come from Ukraine, sunflower oil and parts of fertilizers and so on," said the minister.
India is entirely dependent on imports for phosphatic fertilizers. A spiral in global prices or payment hassles could hurt the country. The Centre subsidizes the supply of urea and phosphorous, and potash-based fertilizers to farmers. According to revised estimates, the government has budgeted over ₹1 trillion as total fertilizer subsidy for FY23, down from ₹1.4 trillion for FY22.
Experts said that although India’s trade with the two nations is a small portion of its overall cross-border trade, specific commodities traded between the countries are important.
“Russia accounts for 1.5% of India’s imports and 0.8% of Indian exports in terms of value. Direct trade exposure is very low, but select trade exposure such as tea exports from India and sunflower oil imports can get affected. Eighty-four per cent of India’s sunflower oil import is from Ukraine, and 13% of India’s tea exports go to Russia," said Sachchidanand Shukla, group chief economist, Mahindra and Mahindra. Sunflower oil supply disruption can be a pressure point on India’s retail inflation.
Every 10% increase in crude price raises retail inflation measured by Consumer Price Index (CPI) by about 40 basis points. If it sustains for about a year, it will slow the GDP growth rate by 20 basis points while the current account deficit goes up by 30 basis points, said Shukla.
India has already cut import duties on edible oils a few times in recent months to cool prices.
Businesses expressed worries about payment hassles, with the US and allies committing to exclude select Russian banks from the SWIFT global payments system as part of sanctions in response to Russia’s attack on Ukraine.
“We have pharma business of $650 million with Russia and $200 million with Ukraine. It is not impacted as of now as it is out of sanctions, but with SWIFT ban on Russia, it can lead to problems in recovery of outstanding amounts and future supplies," said Dinesh Dua, former chairman of Pharmexcil and CEO of Nectar Lifesciences.
Businesses also fear export demand slump in garments. Narendra Goenka, chairman, Apparel Export Promotion Council, said while exports to Russia will be hit, the European Union, a bigger market for garment exporters, will also see a moderation in demand.
“As Europe may face energy issues due to the crisis, we are foreseeing an impact in demand. With the sentiment going down and freight rates expected to go up, there will be a definitive impact on this. There are buyers who have delayed purchases since last week. They are holding up orders. So, we do see an impact," Goenka said.
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