On Febraury 24, something the world had fervently wished wouldn’t happen, happened – Russia’s invasion of Ukraine. After weeks of sabre rattling, during which time there were consistent denials from Russia and charges of Western scare-mongering by Ukrainian President Volodymyr Zelenskiy, the invasion duly arrived to everyone’s horror.

The Biden administration had consistently warned of war and they were sadly proved right. The longer the war drags on, the more brutal and destructive, both in terms of lives and property, it is likely to get.

Economic impact

That a global geopolitical crisis of this magnitude will impact the world economy is a foregone conclusion. However, it is still early days to accurately predict the extent of economic damage the invasion is likely to cause. In the medium term, the world has to brace fro higher fuel prices. Russia, a member of the OPEC+ grouping, is one the world’s major exporters of oil and gas. European nations in particular are heavily dependent on Russian gas.

The West predictably imposed economic sanctions on Russia, aiming to cripple its economy as a punishment. But the consensus emerging now is that the sanctions are unlikely to bite, as Russia has built up a substantial war chest.

The expulsion of Russian banks from SWIFT – the global banking payments system – is also likely to only have a limited impact as only seven Russian banks will be impacted. Even here some sectors, like pharmaceuticals, may be exempted.

So on the economic front, the West seems to be playing with an extremely unfavourable hand.

India’s story

The Russia-Ukraine crisis has cast its shadow on the Indian economy. There is already a question mark over the growth and other projections made in the Budget. Finance Minister Nirmala Sitharaman for now has put on a brave face and sees no necessity for reworking the Budget arithmetic.

In an interview with The Hindu BusinessLine she said, “I won’t quickly conclude that my numbers are under threat and I may have to quickly review my number… no. not yet. Hopefully, I don’t think there would be need for it”.

The most immediate fears are over fuel prices and their inflationary impact. The Budget had assumed crude oil price of $75 a barrel, it is now ruling over $100. Both the Budget and the ensuing monetary policy had a rather sanguine view of inflation going ahead. All those calculations have now come under severe scrutiny, thanks to a global geopolitical crisis over which we have no control.

So if the crisis drags on and the economic pinch becomes more painful, will the government bite the bullet and cut excise duty on fuel to give relief to the common citizens? In the interview, Sitharaman was understandably non-committal. But with the Indian crude oil basket touching $112, and the pressures on the external account imminent, the government may have to take a call soon

Trade tangle

The economic and banking sanctions will also impact Indian exports to Russia. Indian exporters may have to work out alternative payment and settlement mechanisms. The Commerce Ministry is exploring options of alternative payment mechanism and rouble trade deals.

Indian exports to Russia were at $2.6 billion and imports at $5.4 billion in 2020-21, so India has a substantial trade deficit with Russia, which is not surprising given that oil forms a major part of imports.

Tea exporters are a particularly worried lot as Russia accounts for close to 18 per cent of India’s tea exports.

India exports tea, pharmaceuticals, mobile phones, iron and steel, apparel, electronics and machinery. Of course Russia is also India’s largest arms supplier. Between 2000 and 2020 India bought Russian arms worth $35.82 billion and Russia formed 66 per cent of India’s arms imports.

So just when there were hopes of the economy finally recovering from the two-year Covid blow, the Russia-Ukraine crisis threatens to derail it.

Higher inflation going ahead will not only put pressure on common people but will also bite into the margins of corporates. It may also impact consumer sentiments, which economist Ila Patnaik in a recent column in The Print website, says have started looking up. She cites the RBI Consumer Confidence Survey of January 2022 and CMIE data, both of which have recorded a rise.

LIC IPO

The Life Insurance Corporation’s blockbuster IPO plans also seem to have been impacted by the war clouds. The Centre was hoping to mop up ₹63,000 crore for a 5 per cent stake sale. The Finance Minister indicated a couple of days ago that the Centre was looking to rework the IPO’s timing given the geopolitical climate.

Though a delay in the disinvestment may not hit the fiscal deficit numbers it may have an impact on valuations.

So a quick end to the war in Ukraine will not only end the death and destruction there, it will also help people re-build their lives in the post-Covid era.