Ring-Fencing From Ukraine Shock!

Russia’s invasion of Ukraine has put government’s fiscal assumptions at risk. Here’s how it can protect the economy from damage.

- Ashutosh Kumar

AS RUSSIA-UKRAINE war stretches beyond a month with no signs of de-escalation, threatening the post-pandemic fragile recovery, Indian policy makers are looking for the right ammunition to fight back and meet the new economic challenges. So, if India used supply-side measures to salvage its economy during the pandemic, what could be the right tools to deal with macroeconomic uncertainties brought by the war?

The signs are ominous. In a few days of the start of the war, Brent crude oil prices touched a 14-year high of $140 per barrel due to U.S. sanctions on Russia, including expulsion from the SWIFT payment system. Though prices have dipped somewhat since then, they are still high. Crude’s gyration threatens to put India’s economy in disarray with high inflation, widening current account deficit (CAD), depreciating currency, disruption of supply chains and raw material shortage. All of these will significantly dent the much-elusive, post-coronavirus, recovery. According to Japanese research firm Nomura, every 10% increase in oil prices would shave off 0.20 percentage points from GDP growth, widen CAD by 0.3% of GDP and lead to 0.3-0.4% rise in headline inflation.

It looked getting from bad to worse, when international crude oil prices were projected to touch $200 a barrel. Much to India’s relief, they were $109 a barrel at the time of going to press, lending support to rupee, which had fallen to an all-time low of 76.96 against the U.S. dollar in first week of March.