Concerns heighten as the raging Russia-Ukraine war now is in its second week without any near hope for its ending. Analysts have raised angst with respect to global growth in economy and trade, depicting a double whammy. Oil prices are increasing, and inflation is expected to register spiraling growth. Stock markets are plummeting and a downtrend in bond prices raises borrowing costs. The supply chain industry is in shambles, narrowing the hope for revival in global trade. As of today, the supply chain is the key factor for global trade, and accounts for three fourths of world trade.
Alarm has been raised over the damage to the Indian economy, which has began to evince signs of a bounce-back. The noted economist-journalist Dr Swaminathan S Anklesaria Aiyar warned against jubilation, raising ire that, “Ukraine will upend Sitararaman’s dream budget. India is very poor compared with Russia and cannot withstand global economic sanctions.”
In the near term, it may be true. In the longer term, it is not laudable. It is not the first time India faced global sanctions. Sanctions against Iraq is a case in point. India outsmarted those sanctiond by adopting food for oil. The major sanction against Russia, which can maul the trade between India and Russia is the import of crude oil. Half of total imports from Russia (excluding defence items) is crude oil. Nevertheless, Russian crude accounts for only 2 percent of India’s overall imports of oil.
Further, it is not the first time for India to face oil shocks and the consequent challenges. During the three years period of 2012-13 to 2014-15, when the basket price of imported crude oil was ranging between US$106 to US$111 per barrel and eventually inflation (in terms of CPI) sparked to 9 to 10 percent a year, GDP growth made a reverse in its trajectory. It increased from 5.4 percent in 2012-13 to 6 percent in 2013-14 and continued to leapfrog by 7.1 percent in 2014-15. This manifests that even though oil prices escalated inflation, India‘s growth remained resilient because of its strong economic parameters.
One of the factors for the hike in oil prices causing less turbulence on the economy was that consumption patterns in India are not the same as in the West. In India, oil is not the main energy for manufacturing, but rather for transport and lighting sectors. Nearly fifty percent or a little more of petroleum products are used for transportation and lighting sectors. Coal is the main energy for manufacturing and agriculture. In the total energy basket, oil accounts for less than one-fourth. Coal accounts for more than 65 percent.
No doubt, India pivots on oil import dependency. Nearly ninety percent of crude oil demand is met by imports. Given this, the import of crude oil from Russia, which accounts for only 2 percent, is unlikely to impart any major impact on the economy. Given the meager oil dependency on Russia and India’s past experience to tackle global oil price hikes, the Russia-Ukraine row is unlikely to have any major impact on the economy, which as stated is in a bounce-back trajectory.
As regards India–Russia trade, it is less significant than after the breakup of the Soviet Union. Corresponding to the downtrend, and India launching economic reforms in 1991, India’s trade shifted to the USA, EU and South East Asia. The “Look East “ policy and India’s aggressive nuclear deal with the USA for peaceful purposes made a dynamic shift in its global trade.
Hitherto, Russia was an important export destination. India had a favorable trade balance with Russia till the end of 2000. The situation reversed with oil imports in the mid 2000’s. Russia was an important destination for the export of consumer goods like tea, and ready-made garment and pharmaceutical products. Trade significance with Russia ebbed and increased with the West and South East Asia as new challenging destinations, owing to structural changes in Indian manufacturing, from the rapid growth in electronic and automobile industries. Currently (2020-21), Russia accounts for less than 1 percent of India total exports, against 2. 5 percent in 1997-98 and 1.4 percent of total imports against 1.3 percent in 1997-98.
Since much of the trade between India and Russia is in terms of Rupee-Rouble foreign exchanges, sanctions against Russian banks using SWIFT (Society for Worldwide Interbank Financial Telecommunication) will reduce trade between the two countries. Nevertheless, excepting tea, Russia is not a major market for Indian goods. Russia accounts for 2.6 percent of India’s total export of tea, coffee.
Russia is not a major foreign investor in India. During April 2000 to June 2021, Russian investment in India was US$1.26 billion, which is less than one percent
To sum up, Russia is not an important economic ally to India. To this end, India’s bounce back in the economy is shielded and is unlikely to be mauled the by Russia- Ukraine War.