Higher Brent crude oil prices triggered by the Russian-Ukraine war will erode consumers' disposable income due to higher fuel prices and will curtail aggregate demand in the economy, say experts.
For the first time since 2014, the crude oil prices surged past $100 a barrel amidst Russian armed forces invaded in the Donbass region of eastern Ukraine. There are concerns that the war in Europe could disrupt the global supply of gas and oil.
Moscow is the second-largest oil producer in the world and supplies its crude to European countries. As per the reports, about 35 percent of natural gas is provided to European nations by Russia.
On Thursday, the Brent crude price increased to $103.78 a barrel, the highest since 2014. However, a day ago Russian President Vladimir Putin had assured that the natural gas supply would be continued even after whatever situation may be.
Let us analyse what impact India would face with this surge.
According to Shishu Ranjan, Vice President of Barclays, an increase in the Brent price is expected to put higher inflationary pressure on the Indian economy, which is already reeling under record high inflation in last 5 years.
The latest CPI indicated breach in upper limit of 6 per cent Inflation target set by RBI. Double digit WPI for last several month has already put pressure on RBI to increase the rates, which may adversely impact investment expenditure.
Higher brent prices will increase the input cost of industrial production and make Indian products uncompetitive.
On the retail side, consumers' disposable income will erode due to higher fuel prices and will curtail aggregate demand in economy.
This situation needs to be managed as the recovery from the Covid19-led recession is highly dependent on stimulating aggregate demand as well as maintaining an accommodative monetary stance of the Reserve Bank of India, which can happen only if inflationary pressure resulting out of Brent prices are managed well.
Anish De, KPMG's national head for energy, natural resources and chemicals, told Asianet Newsable that India has very large and growing energy requirements.
"Especially in oil, given that we rely on imports for more than 85 percent of our needs the oil price increases that accompany conflicts among nations has an obvious negative effect. It can impact both economic growth and inflation levels."
Economic expert Prakash Chawla said that India is hugely import-dependent on crude oil.
"Over 85 percent of our crude oil requirements are met by imports. With the oil flaring up in the international market to over $100 per barrel, the impact on Indian oil marketing companies and the users is going to be significant," he said.
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"Maybe, the Narendra Modi government would try and cushion the impact till the end of UP elections, but the spiral in petrol and diesel prices is inevitable," Chawla said.
"Overall, the impact is going to be inflationary in a significant manner; this is at a time when our economy is battling the WPI inflation well above double digit while retail inflation of six per cent too is giving anxiety to the policy makers and the common woman," the economic expert said.
"Our oil economy would face a double whammy. First the crude oil itself is spiralling because of a major upheaval in the international market; secondly, the dollar is rising fast above Rs 75, pushing up the landed costs of all our imports, including essential raw materials in pharmaceuticals, fertilisers and even defence," he said.
Besides, if the war escalates and gets prolonged, the government finances too would go topsy-turvy. The Budget for 2022-23 had set some basic assumptions like crude oil staying around 70-75 dollar per barrel, he added.
"Must say, the worsening geo-political situation could not have come at a worse time. Even as we are managing to control Covid 19 pandemic, the economic impact of the war would add to the woes of the common man," Prakash Chawla said.
The Indian government has to put all diplomatic efforts together , along with seeking immediate cushioning solutions for minimising the economic impact, he added.
Dr Utsav Kumar Singh, Assistant Professor at University of Delhi’s
Shaheed Bhagat Singh College said, "We live in an increasingly interconnected world. That means the events, both good and bad, happening in one place have the potential to effect people living in far-off places."
Since, India imports significant chunk of its oil requirement, there is going to be an inflationary impact as well as a rise in its current account deficit as the share of oil imports accounts for a quarter of its total imports, Dr Singh said.
The rise in crude oil prices is also expected to increase the subsidy on LPG and kerosene, pushing up the subsidy bill, the University of Delhi professor added.
The retail consumers can soon expect an increase in the prices of petrol and diesel as the government, after the announcement of the election results on March 10, might want to pass on the increased burden on to the consumers, he said.