International crude oil prices, expected to remain elevated amid the Russia-Ukraine war, may cost India 1.9% GDP, hit households to the tune of $22 billion (about Rs 17 lakh crore), stoke inflation by one percentage point, cut excise revenues, and widen current account deficit. The escalating crisis between Ukraine and Russia could lead to potential disruptions in global energy trade and price disruptions, and can materially weigh on growth in the first half of fiscal year 2023, Madhavi Arora, lead economist, Emkay Global, told FinancialExpress.com.
Crude prices hit the highest levels since 2008 with Brent at $139.13 per barrel in early trade on Sunday, according to a Reuters report. While the Indian rupee touched its weakest level ever at Rs 76.96 against the dollar on Monday as investors moved to the safe-haven appeal of the greenback. The Russian invasion of Ukraine and likely lower exports of Russian crude oil will keep crude oil prices elevated for a protracted period, said Kotak Institutional Equities in a note Monday.
Additional cost to economic growth, trade deficit to balloon
Morgan Stanley said in a note Friday that the recent 25% jump in oil prices will expand India’s current account deficit by 75 basis points and inflation by 100 basis points on an annualized basis. A ballooning current account deficit means India will import more goods and services than it exports, which will effectively devalue the Indian rupee.
The geopolitical uncertainties will also slow economic activity in India and create an impediment in the GDP growth rate of Asia’s third largest economy. The slower economic activity will impact corporate earnings and household spending. Kotak Institutional Securities said it estimates the war between Russia and Ukraine to cost the Indian economy an additional $70 billion i.e. about 1.9% of GDP, versus FY 2022 levels, at an average crude price of $120 per barrel.
How higher crude oil prices hit Indian economy per $10/bbl
CAD (Current Account Deficit) could widen by $14-15 billion (0.4% of GDP) for every $10 per barrel increase in the average price of the Indian crude oil basket, ICRA said. “Accordingly, if the price of the Indian crude oil basket in FY23 averages $100/bbl, then the CAD is projected to widen to $85-90 billion (2.4% of GDP), close to the absolute level in FY13 (albeit a much higher 4.8% of GDP),” ICRA’s chief economist Aditi Nayar said.
Emkay pegs every $10 per barrel increase in Brent prices to impact India’s GDP by 16-20 basis points. “Not fully accounting for a sustained oil price risk of above $100/bbl, our current FY23 inflation forecast of 5.3% is already ~70bps+ higher than that of the RBI (4.5%),” the brokerage said. It sees every $10 per barrel increase in Brent prices to impact India’s retail inflation by 30-35 basis points and wholesale inflation by 130 basis points.
Mitigating risks: What can the government do?
Kotak said the crisis in Ukraine could have a $23 billion impact on the government of which $20 billion will be in the form of lower excise revenue, and $3.5 billion for higher MSP. “The government may have to cut excise duty on diesel and gasoline further to mitigate the impact on consumers. We assume it will not bear any LPG subsidy. Excise revenues may decline by US$20 bn assuming a Rs10/liter cut in excise duty on diesel and gasoline,” it added.
Since the impact will be felt across the economy the burden will also have to be shared. BR Bhanumurthy, Vice Chancellor of Dr B R Ambedkar School of Economics University, said the government cannot absorb all the shortfalls. He added that the burden, which is aggravating day-by-day, will have to be shared by the Ministry of Finance, Reserve Bank of India as well as private sector companies. The impact can be mitigated if everyone chips in, he added.
A hole in pocket of 350 million Indian households
The impact of spiking prices will be felt by across 350 million households in India but it will disproportionately impact lower- and middle-income households. An average Indian household will bear the burden in the form of higher petrol, diesel and LPG prices and day-to-day products prices, Kotak said. In the coming fiscal year, Kotak estimates the direct impact of the Ukraine crisis on households to be about $22 billion while it estimates the impact on companies to be of about $23 billion, bulk of which will be transferred to households.
When companies transfer the high freight and fuel prices onto the consumers, this will eventually impact the budgets of households and reduce disposable income in their hand. “We expect companies to transfer the bulk of the RM (raw material) increase to households eventually through higher product prices. However, we see lower gross margins and volumes both in FY2023; it may not be easy to fully raise product prices immediately. Thus, households will bear the cost indirectly through higher prices, effectively resulting in US$23 bn (0.7% of gross disposable income) impact in FY2023,” Kotak said in a note.
