An already slowed Indian economy faces fresh risks

Higher oil prices over Ukraine crisis add to India’s woes of widening trade deficit, weakening rupee, higher inflation.

Customers buy vegetables at a wholesale market in Bengaluru, India
Three waves of COVID have pounded small businesses and caused huge job losses [File: Bloomberg]

Rising crude oil prices and supply disruptions following Russia’s invasion of Ukraine could further sap an Indian economy already slowed by COVID-19, posing risks to household spending and private investments, economists have said.

India, which meets nearly 80 percent of its oil needs through imports, could be hit by a widening trade deficit, weakening rupee and higher inflation after Brent crude prices shot above $105 a barrel last week, the economists said.

The “surge in oil prices as a result of the [Ukraine] crisis poses considerable risks to the Indian economy”, Aditi Gupta, an economist at Bank of Baroda, said in a note on Friday.

India’s economy likely grew 6 percent year-on-year during the three months to end-December, a survey showed last week, slower than the previous two quarters, with new fears rising over slowing momentum after Russia’s invasion of Ukraine.

The median forecast from a survey of 38 economists interviewed between February 21 and 23 was that gross domestic product (GDP) in Asia’s third-largest economy grew 6 percent year-on-year in the October-December quarter, after expanding 20.1 percent in the April-June period and 8.4 percent in July-September.

The growth forecasts ranged from 3 percent to 7.5 percent. India is set to announce its GDP data for the end-December period and new estimates for the year to end-March on Monday at 1200 GMT.

Indian rupee was the second-worst performer in Asia last week

Slower pace of expansion

A 10 percent rise in crude oil prices could lower India’s GDP growth by 0.2 percentage points, while posing risks to corporate profit margins as they would not be able to pass on rising input costs, Sonal Varma, an economist with Nomura Holdings, wrote in a research note.

Private consumption, which contributes nearly 55 percent to India’s GDP, is also still below pre-pandemic levels after a severe blow to household incomes from two years of pandemic disruption.

Three waves of COVID-19 have pounded small businesses, hitting restaurants, tourism, educational institutions and retail, and causing huge job losses.

A slower pace of expansion could hurt investment and job creation, testing fiscal and monetary policies that have remained loose despite rising inflation pressures.

New Delhi, however, says the economy has been on the mend due to its reforms and vaccination programme, and that the third pandemic wave in January had a limited economic effect.

“Supply shortages remain a near-term headwind. But when they do ease, the recovery should start picking up in earnest,” said Shilan Shah, an economist at Capital Economics in Singapore.

The Reserve Bank of India (RBI), which has slashed its repo rate – the interest rate at which it lends money to commercial banks – by a total 115 basis points since March 2020 to cushion the shock of the COVID-19 pandemic, has maintained its accommodative monetary stance to support the economic recovery.

RBI has projected economic growth of 9.2 percent for the fiscal year to March 31, 2022, and 7.8 percent for the following year.

Prime Minister Narendra Modi’s government last week flagged that the pandemic recovery will be challenged by geopolitical risks.

“When value chains are facing challenges and threats because of these disturbances, our recovery, not just for India, but countries everywhere will be severely hampered,” finance minister Nirmala Sitharaman said Friday. “Hopefully, some kind of restoration of peace at the earliest will happen based on which recoveries can be sustainable.”

Source: News Agencies