It is unfortunate that the Russia-Ukraine conflict should flare up to upset India’s growth prospects, just as a virtuous cycle of rising consumer sentiment and demand, soft inflation, low rates and an improving fisc were working to lift the economy out of its Covid slumber. Data releases show the economy was beginning to lift its head up just ahead of this event. The PMI Manufacturing and Services indices, after dipping below 45 in June/July 2021, had revived to 52-56 in the last seven months. Core industries expanded 11 per cent between April 2021 and February 2022. A 36 per cent surge in exports had reduced India’s Current Account Deficit (CAD) to less than 2 per cent and helped build a forex cushion of over $610 billion. The Nifty companies too expanded earnings by nearly 70 per cent between April and December 2021. High tax buoyancy, with corporate tax collections up 61 per cent and GST up 32 per cent, has helped contain India’s fiscal deficit at just 82.7 per cent of estimates by end-February 2022.

But this honeymoon has been rudely interrupted by the Russia-Ukraine war, which has brought back global supply chain disruptions, sent crude oil and industrial raw material prices soaring and put foreign investors in a risk averse mood. India’s crude oil basket, which averaged $73 a barrel in FY22, is now at $103. Prices of industrial feedstock from gas to pet coke have soared, with food prices at record highs. Should prices sustain at these levels, they could pose hurdles to the incipient recovery. With every 10 per cent rise in oil prices adding 30-40 basis points to the CPI, there’s a risk of CPI inflation in FY23 ruling above RBI’s projected 4.5 per cent. This could prompt the central bank to review its accommodative stance on rates, putting a capex-led recovery at risk. Fuel price pass-throughs could hurt household incomes and discretionary spends. Should oil prices hold above $100, India’s CAD could breach 2 per cent in FY23. Without FPI flows to fill the gap, this could set the stage for further depreciation of the rupee. Rising costs can also hurt corporate profits, reining in tax buoyancy and throwing Budget assumptions into disarray.

Given that every recent balance of payments crisis in India including in the early nineties and in 2013, was sparked off by rising oil and a plunging rupee, policymakers must remain vigilant to prevent this situation from spiralling out of control. If the war is creating challenges, there are mitigating factors as well. The conflict has opened up export opportunities for Indian producers in a range of commodities from wheat to steel, with a weaker rupee helping the cause. Buoyant food prices can have a salutary effect on rural incomes. Geopolitical tensions elsewhere, and initiatives such as PLIs, could prompt FDI investors to take a serious look at India as an investment destination. The government should harness such opportunities to ring-fence the economy from the ill-effects of the Ukraine war and get the virtuous cycle going again.

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