Ukraine war may see import bills topping USD 600 bn this fiscal, pushing up inflation, CAD: Report

PTI, Mar 1, 2022, 5:09 PM IST

Mumbai:  The ongoing crisis in Ukraine is set to push the country’s import bills beyond the USD 600 billion mark this fiscal, given India’s import dependence on crude oil, natural gas, gems and jewellery, edible oils and fertilisers, which can lead to a spike in inflation and current account deficit, and a falling rupee, warns a report.

Ratings agency India Ratings on Tuesday said the ongoing geopolitical risks arising from the Russia-Ukraine war would push India’s import bills higher for items such as mineral oils and gas, gems and jewellery, edible oils and fertilisers. As a result, merchandise imports may cross USD 600 billion in FY22, up from USD 492.9 billion in the first 10 months.

The impact will be felt more on inflation, a widening current account deficit and a falling rupee, its chief economist Devendra Pant said in the report, adding a USD 5 per barrel increase in crude oil prices will translate into a USD 6.6 billion increase in trade/current account deficit.

The ramifications of the Russia-Ukraine war on the domestic economy will be felt via higher global commodity prices (crude oil has been on a boil, surging to USD 103.15 a barrel on February 27).

Even the forex crunch facing Sri Lanka is likely to have some macro impact on India, he added.

Merchandise trade with Sri Lanka had peaked at USD 7.46 billion in FY15, and since then it has declined to USD 4.42 billion in the first three quarters of FY22.

Likewise, merchandise trade with Ukraine, which had peaked at USD 3.11 billion in FY13, has declined to USD 2.35 billion so far in FY22 from USD 2.59 billion in FY21.

India’s merchandise trade with Russia was a bit higher at USD 8-11 billion during FY18-FY21 and stood at USD 9.44 billion so far this fiscal.

In percentage terms, Sri Lanka’s share in India’s merchandise trade basket oscillated between 0.55 – 1.06 per cent since FY05, Ukraine’s share has been at 0.24 – 0.42 per cent and that of Russia between 0.79 and 1.39 per cent, standing at 1.27 per cent so far this fiscal.

Overall, the country has been maintaining a merchandise trade surplus with Sri Lanka and a trade deficit with Ukraine and Russia during FY04-FY21.

Trade surplus with Sri Lanka was USD 2.88 billion and with Ukraine and Russia at USD 1.60 billion and USD 4.34 billion, respectively, so far this year.

On the impact on inflation due to higher imported prices and weaker rupee, the report said a 10 per cent increase in petroleum product prices without factoring in currency depreciation will lead to a 42 basis points (bps) increase in retail inflation and 104 bps in wholesale inflation.

The impact of a 10 per cent increase in price of sunflower oil without factoring in currency depreciation will be a 12.6 bps increase in CPI and a 2.48 bps jump in wholesale inflation, he added.

A 10 per cent increase in prices of these two commodities alone can push retail and wholesale inflation upwards by 55 bps and 109 bps, respectively.

The report fears that the conflict can trigger capital flight from emerging markets, which can result in weakening of the rupee but it expects the higher forex reserves (USD 632.95 billion as of February 18) to provide a cushion to a large extent.