Date: 24/02/2023

Relevance: GS-2: Effect of Policies and Politics of Developed and Developing Countries on India’s interests, Indian Diaspora.

Key Phrases: Ukraine-Russia war, Economic Sanctions on Russia, global supply chain, Russia's Discounted Oil Exports, World Economic Outlook, Capital inflows, De-Dollarization of Trade, strategic neutrality.

Why in News?

• The Ukraine-Russia war, which began with Russia sending two lakh troops into Ukraine, has resulted in the death of over 8,000 civilians and has led to an estimated eight million refugees fleeing their homes.
• While the war initially disrupted supply chains, trade, and growth, India has managed rather well, economically and in strategic terms.

Global Impact of war:

• The war in Ukraine has led to a sharp rise in food, fuel, and fertilizer prices globally.
• The surge in inflation rates has prompted central banks in developed countries to tighten monetary policy, which may result in higher interest rates and slower economic growth.
• Developing countries, particularly in South Asia, have been hit hard by a combination of weaker currencies, higher import prices, and rising costs of living, making debt servicing more expensive.
• As the global supply chain has been disrupted, industries such as automotive, electronics, and pharmaceuticals have been impacted, resulting in production delays and higher prices for consumers.
• Geopolitical tensions have increased, leading to uncertainty in financial markets and reduced investment flows.

The Impact of Economic Sanctions on Russia:

• Despite the conflict, economic sanctions on Russia are not being harshly imposed.
• The US and the EU are not keen on enforcing sanctions in a manner that would hurt their economies. As a result, commodity prices are off their mid-2022 peaks.
• Russia has been a key global supplier of several metals (titanium, aluminium, and nickel), chemical gases used in semiconductor production, wheat, and fertilizers, among other commodities, as noted by the US Congressional Research Service in its December report.
• Hence, the US and the EU are treading carefully with sanctions, given the global supply chain's interconnectedness.

Impact on India:

• India's Economic Position amidst the War :
  • Despite the conflict, India remains the fastest-growing economy, with a projected growth rate of 6.1% and 6.8% for 2023 and 2024, respectively, according to the IMF's January update of its World Economic Outlook.
  • This is in contrast to Russia's projected growth rate of 0.3% in 2023 and 2.1% in 2024.
  • The US and Euro Area are expected to grow by 1.4% and 0.7%, respectively, in 2023, and 1% and 0.6% in 2024.
• Russia's Discounted Oil Exports:
  • Since December 2022, Russia has been faced with a price cap of $60 a barrel on its crude exports, leading to the country selling its oil at a deep discount, with China and India emerging as major buyers since the onset of the war.
  • India is now purchasing 1.2 million barrels of crude oil a day from Russia, 33 times more than a year earlier.
  • Russia has emerged as India's fourth-largest import partner, after China, the US, and the UAE, with fuel-driven imports at $37.2 billion for April-January of FY23, a 384% increase over the previous year.
  • Steel imports from Russia were up five times in volume terms during this period, according to a report.
• Inflation:
  • The conflict has led to lower global commodity prices, including crude oil, which has helped to contain inflation in India.
  • However, the conflict has also led to supply chain disruptions, which have led to higher input costs for Indian firms, leading to significant upward pressure on inflation.
• Capital inflows:
  • The conflict has led to a flight to safety among investors, leading to an increase in capital inflows into India.

India's Need for De-Dollarization of Trade:

• India must be serious about "de-dollarization" of trade, which has not taken off on the ground with respect to Russia. Geopolitical stability can result in volatility, which can be hedged.
• The Reserve Bank of India can bolster gold reserves, which have remained flat at just over $42 billion between April 1st last year and February 10th this year. This will reduce the impact of volatility resulting from geopolitical instability.

Conclusion:

• The ongoing conflict between Russia and Ukraine has had significant impacts on the global economy, including India's.
• However, the conflict has also presented opportunities for India to attract foreign investment as a potential partner against China, particularly in industries such as pharma and specialty chemicals.
• To mitigate the negative effects of the conflict, India must focus on boosting domestic production, diversifying its import sources, and investing in renewable energy sources.
• Additionally, India should continue to strengthen its ties with other countries and seek diplomatic solutions to the conflict.
• With a proactive and strategic approach, India can navigate the challenges posed by the Russia-Ukraine war and emerge as a stronger and more resilient economy.

Source: The Hindu BL

Mains Question:

Q. How has India managed to maintain economic growth and strategic neutrality in the face of the ongoing conflict between Russia and Ukraine, and what steps can it take to mitigate potential impacts on its economy and trade?