The fragile post-pandemic recovery is in jeopardy as a result of the Russia-Ukraine conflict, which has been raging for more than a month with no signs of de-escalation. Indian policymakers are searching for the best weapons to counter this threat and address the new economic issues.
What might the appropriate tools be to deal with the macroeconomic uncertainty brought on by the war if India adopted supply-side tactics to preserve its economy throughout the pandemic?
There are worrying indicators. Due to U.S. sanctions on Russia, including its removal from the SWIFT payment system, Brent crude oil prices reached a 14-year high of $140 per barrel within a few days of the start of the war. Prices have now decreased significantly, although they are still exorbitant. With soaring inflation, crude’s gyration poses a threat to throw India’s economy into turmoil. Depreciating currency, supply chain disruptions, growing current account deficit (CAD), and a shortage of raw materials. This will all seriously hamper the illusive post-coronavirus recovery. According to the Japanese research company Nomura, every 10% increase in oil prices would reduce GDP growth by 0.20 percentage points, widen the CAD by 0.3% of GDP, and cause headline inflation to climb by 0.3-0.4%.
When international crude oil prices were predicted to reach $200 per barrel, things appeared to be going from bad to worse. To the relief of India, oil prices were at $109 per barrel at the time of publication, supporting the rupee, which had dropped to an all-time low of 76.96 versus the dollar in the first week of March.
That hasn’t stopped financial institutions from doing so, though. Somewhat decreasing the estimate for India’s GDP growth in FY2023. India’s growth was previously predicted by the United Nations Conference on Trade and Development (UNCTAD) to reach 6.7% in CY2022 but has now been reduced to 4.6%. Due to the high cost of energy, Fitch Ratings has reduced its growth prediction by 180 basis points to 8.5%. While Morgan Stanley reduced its projection from 8.4% to 7.9%, Moody’s decreased its prediction for CY2022 GDP growth from 9.5% to 9.1%. Citigroup reduced their prediction from 8.3% to 8%. For FY2023, the Economic Survey predicted growth of 8 to 8.5 percent.
What choices does India have to address the difficulties at hand now that the majority of the fiscal and monetary armoury has been depleted fighting the pandemic?
The total amount of monetary and fiscal stimulus has exceeded $30 trillion. Budgetary options are limited. With the repo rate around 4% over the past two years roughly and the approaching removal of post-pandemic liquidity, monetary policy is also constrained. The problems are made worse by a hawkish U.S. Federal Reserve and high global inflation.
Shaktikanta Das, governor of the Reserve Bank of India (RBI), and Finance Minister Nirmala Sitharaman have made an effort to calm people’s fears. “India’s development is likely to be tested by newer difficulties emanating from the world,” Sitharaman remarked following the start of the crisis. You (the industry) can rest certain that we are thoroughly informed about the issue.
On March 21, Das stated during a CII National Council meeting, “I would like to make it very clear with a lot of emphasis that even Moving forward, we’ll make sure there is plenty of liquidity in the market to support a healthy credit system.
