IMPACT OF RUSSIA UKRAINE WAR ON INDIA

WHY IN NEWS?

The Ukraine Russia war is presently leaving a marked impact on the Indian economy and financial system. Despite the neutral political stance maintained by India and the fact that trade with both Russia and Ukraine involves only a small portion of India’s overall cross-border trade, their conflict is affecting India’s GDP growth. India’s overall trade stands at more than $800 billion of which the trade with Russia and Ukraine constitutes nearly 1% and 0.2% respectively.

BILATERAL RELATIONS

India-Russia

• After the dissolution of the Soviet Union, Russia inherited its close relationship with India which resulted in both the nations sharing a special relationship. Russia and India both term this relationship as a “special and privileged strategic partnership”. Both these nation shares common platform like BRICS, SCO etc and have close military relations.
• India Russia bilateral trade stands at $9.4 billion in which Indian exports to Russia is around $2.55 billion and the imports from Russia accounts for $6.9 billion.

Major components of bilateral trade:

1. Top import items in India from Russia includes:
   1. Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes
   2. Defence equipment

• Natural or cultured pearls, precious or semi-precious stones, precious metals

1. Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof
2. Electrical machinery and equipment and parts thereof
3. Fertilizers

1. Top export items from India to Russia includes:
   1. Pharmaceutical products
   2. Electrical machinery and equipment and parts thereof

• Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof

1. Organic chemicals
2. Vehicles other than railway or tramway rolling-stock, and parts and accessories thereof
3. Tea

India Ukraine

• India has an extensive bilateral relationship with Ukraine, spanning all spheres of cooperation. India was one of the first countries to recognize Ukraine. Bilateral trade between the two countries has grown significantly in the last 25 years, and in 2018-19, was almost US$ 2.8 Billion.
• India is Ukraine’s largest export destination in the Asia-Pacific and the fifth largest overall export destination.

1. Main items of export from Ukraine to India are
2. Agricultural products such as Sun Flower oil, Vegetable oil.
3. metallurgical products,
4. plastics and polymers
5. phosphatic fertilizers
6. major Indian exports to Ukraine
   1. pharmaceutical products
   2. machinery
   3. chemicals
   4. food products

• A number of Indian companies like Ranbaxy, Dr. Reddy’s Laboratories, Sun Group etc. have their representative offices in Ukraine. Representatives of major pharmaceutical companies have also set up an ‘Indian Pharmaceutical Manufacturers’ Association in Ukraine.

IMPACTS

The economic impact of the war is being felt all around the world. But in particular, the concern is among the developing economies of Asia which includes India

1. CRUDE PRICES AT ALARMING LEVEL

• Over the days of the war, price of the crude oil gets fluctuated which in turn added to the India’s challenge because, India had to import 80%of its total fuel needs.
• It is being estimated that India buys around 2% of its total crude oil requirements from Russia (Though we are not importing much, it will impact)

2. IMPACT ON THE OTHER OILS

• Russia Ukraine conflict might have a potentially disastrous impact on other oils
• In India, edible oil market depends heavily on Russia and Ukraine. Presently, the imports have been hit hard due to the Russia Ukraine conflict. India incidentally is the world’s largest exporter of edible oils. Its import, mainly form the war zone accounts for about 56% of its total demand.
• Sunflower oil makes up 19% of all edible oil imports. Recent figure shows that about 81% of India’s sunflower oil has been imported from the Ukraine and 12 % from Russia.

3. PHARMACEUTICAL SECTOR

• Another area, which might get in India because of the present-day conflict is the pharmaceutical sector. Big Indian pharma companies are having production facilities and offices in Russia as well as in Ukraine which date back 3 decades. hence, duration of the war will decide the future of these facilities and the stocks

4. AUTOMOBILE SECTOR

• Another sector that might take a hit is the automobile sector, globally as well as in India.
• Rise in the oil prices, continued shortage of semiconductors and chips and other rate earth metals is likely to add to the industries worse
• Russia accounts for 35% of the global production of palladium and 10% of the platinum. Both are key input in the catalytic convertors and plays a major role in the automobile supply chain
• Ukraine is also home to many companies which manufacture car components for the automakers .and some of them already have to shut factories there

5. TEA

• India’s Tea sector is one of the biggest losers due to the conflict between Russia and Ukraine. Russia alone imports almost 13% of India’s total tea exports

6. FERTILIZER INDUSTRY

• The aggression is going to impact our fertilizer supplies in a big way with regard to price and availability.Russia is the second-largest producer of ammonia, urea, potash and the fifth-largest producer of complex phosphates. The country accounts for 23% of the global ammonia export market, 14% of urea, 21% for potash and 10% of the complex phosphates. The war has already started disrupting global fertilizer market, as Russia is a leading supplier of fertilizer and related raw materials. It is also the largest exporter of urea, NPKs, ammonia, UAN and ammonium nitrate, and the third-largest potash exporter.
• India depends heavily on imports for meeting its fertilizer raw materials (natural gas, sulphur and rock phosphate), intermediates (ammonia and sulphuric and phosphoric acids), and finished products (diammonium phosphate, potash and complex fertilizers) requirements. The self-sufficiency in urea production achieved by 2000 was lost due to unfriendly policies which discouraged further investments in the sector for two decades and also due to the privatization move and closure of a number of plants on account of low energy efficiency which paved the way for large scale imports.

OTHER IMPACT

1. Rise in Inflation

• The increase in the oil prices resulting from the Russia Ukraine war will have a direct impact on the freight movement because of which food items such as fruits, vegetables, oil, and pulses, among others are likely to be expensive.
• If inflation rises in India, it will increase beyond the projected figures and India’s central bank which is the Reserve Bank of India will then be forced to increase the rates.

2. Heavy selling by foreign investors in the Indian stock market

• Markets have also been heavily impacted by the ongoing standoff between Russia and Ukraine as foreign portfolio investors (FPIs) pulled out over Rs 1 lakh crore from the Indian markets in the three months since the stalemate began, Rs 50,000 crore more than the combined withdrawal of previous nine months.

3. Weakening of Indian rupee

• Other cause for heavy selling by foreign investors in Indian markets are monetary tightening around the world due to inflation. foreign portfolio investments (FPI) pull-out has led to the depreciation of the Indian rupee versus the US dollar. Rupee depreciated by approximately 4 per cent from 77.53 against the US dollar on February 24, when the war began, to 77.7 against the dollar by May 31. Weak rupee has also impacted imports adversely, especially oil imports. The rise in crude oil prices will boost India’s oil import bills, and gold imports may rise again, putting pressure on the rupee.

REASONS FOR THE IMPACT

1. The withdrawal of the credit guarantee

• The Export Credit Guarantee Corporation’s decision to withdraw cover for goods bound for the war-striken region has harmed Indian exports worth $500 million to Russia and the CIS (Commonwealth of Independent States).Revising its underwriting policy on Russia, ECGC has now put that country in the Restricted Cover Category (RCC-I) from the earlier ‘Open Cover’ category.
• Sanctions against Russian banks and the threat of disruptions at Baltic ports as a result of the Ukraine invasion compelled the ECGC to make this decision. However, this has displeased Indian exporters.

2. SWIFT sanctions on Russia

• Ban on the Russian banks accessing the SWIFT banking system is a concern for the Indian exporters. Incoming payments of about $500million from Russia are in limbo till the rupee-ruble trade arrangement can be worked out between the Indian and Russian government
• Amid sanctions on Russia, India might face interruption and delay in arms import. Russia is also India’s biggest arms supplier. Almost 60-70% of its military supplies are from Russia.
• India is procuring the S-400 air defence systems from Russia. It also recently signed a contract for AK-203 rifles with production slated to begin in India soon.
• Sanction son Russia could jeopardize India’s recent $375 million BrahMos cruise missile export contract with the Philippines.
• However, there is some relief for the country as India and Russia bilateral payments are made in Indian Rupee and sometimes in other currencies like Euro for both imports and exports. So, sanctions on Russia may not have an impact on the payments.

3. Disruptions at the Baltic port amidst the Ukrainian war

• Russia Ukraine conflict had led to the suspension of some activities in the Baltic port which in turn led to the supply chain disruptions thereby hampers the imports and exports.
• Movement of the ships in Black Sea has been severely affected which will in turn hit hard on the India’s exports.

OPPURTUNITIES FOR INDIA IN THE BACKDROP OF THE RUSSIA UKRAINE CONFLICT

1. Wheat export

• The first silver lining for India out of this crisis is the exports. Indian rupee has devalued against the US dollar. This is said to give an incentive to the Indian exporters.
• Ukraine and Russia are the major exporters of food grains. both these nations together accounts for 30% of global wheat exports. Disruption in the region has pushed the wheat prices up to almost 14-year level high.
• India, being the 2^nd largest exporter of wheat, in such a scenario stands to gain, as the US department of agriculture had estimated that India is likely to export around 10 million tonnes of wheat.
• India is already in conversation for the export of wheat throughout the middle east. India can extend its export potential in the foodgrains to Lebanon, turkey etc.

2. Metal and mining companies

• Another category of company which also will gain in the near term because of the war induced inflation is the metal and mining companies
• Russia and Ukraine together export about 10% of the global demand of aluminium and steel
• India is also one of the major exporters of aluminium and steel. Going ahead, these exports will also increase especially to the European countries and to the USA in the near term.

WAY FORWARD

• In the long run, India should reduce its reliance on fossil fuels so that it is not caught in the crossfire between the West and Russia again. India could adopt a multi-pronged approach to achieve this goal. The states should consider offering one-time subsidies to its vulnerable populace to temper the crisis’ impact at present. Simultaneously, India could strengthen the Indian banking system by addressing asset quality concerns and strengthening banks’ balance sheets.
• Finally, India could transition towards a greener circular economy by allocating Special Economic Zones (SEZs) to greener enterprises. The government could also incentivize the manufacturing community to capitalize on the opportunities afforded by the “lucrative Indian market.” Ideally, manufacturers would curate their products to suit the needs of the Indian consumer—in terms of price and quality

PRACTICE QUESTION

Russia – Ukraine war impact on Indian is a mixed bag of both opportunities and challenges, critically comment.

 (150 Words, 10 Marks)