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Here Is How War On Foreign Land Affects Indian Economy
India, which is the world's third-biggest oil consumer, fulfils over 80 per cent of its crude oil needs and around 40 per cent of its natural gas requirements through imports
Photo Credit : PTI
Chaos, panic and anxiety were felt across the globe when President Vladimir Putin led Russia invaded Ukraine. Be it human lives, global markets and businesses, everyone saw the crisis that unfolded and India was no exception.
Shortly after, the business ecosystem across the globe faced the heat. According to the experts, the markets will still remain volatile. As far as India is concern, import expenditure will go up because of which the trade deficit will also increase.
To recall, Putin authorised a military operation in eastern Ukraine in February amid Russia's demands for an end to North Atlantic Treaty Organisation (NATO) eastward expansion.
"Russia and Ukraine are not the very large trade partners of India. A direct impact may not be significant. However, most trade is concentrated in crude oil and products, pharmaceuticals, edible oils, gems and jewellery. Most of the impact on the macro will depend on the sustenance of higher crude prices and its impact on external sector balance and inflation," said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities told BW Businessworld earlier.
Now, about 6,500 km away, Yemen is another war-torn country in Western Asia and at the end of the Arabian Peninsula. The United Nations has said that the country is facing the world's worst humanitarian crisis in the entire world. As the situation deteriorating day by day, a total of 8 million Yemenis will likely lose all humanitarian aid in March unless urgent funds are delivered, UN officials have warned.
To recall, the country has become a battleground for the United States (US) and Iran proxy war. According to the reports, many have died and over four million men, women and children have been displaced in Yemen’s eight-year-long conflict. In January 2022, Yemen witnessed the highest toll (more than 650 civilians killed or wounded in the last three years. Talking about civilian displacement, over 23,000 civilians have been displaced since 2022.
While explaining geopolitical tension in the West Asian country and its impact on India, Sharad Chandra Shukla, Director, Mehta Equities said, "India imports more than 80 per cent of its total oil requirement. India is the world's third-largest importer of oil. In the year 2020-21, India’s oil imports bill was about USD 80 billion. Due to economic recovery and higher oil prices in FY22, the estimated oil import bill may be USD 150 billion. The surge in oil prices will result in considerable risks to the Indian economy. Higher oil prices pose risks to external stability and currency movement. In these circumstances government may have to change the fiscal targets given the rising yields."
India’s interest in Yemen:
Yemen has always been a country of significance for India in the region. From past to present, both countries have maintained strategic relationships. India provides several forms of aid to Yemen like scholarships to its citizens in the fields of agriculture, IT, science, English. Several Yemeni students living in cities like Bangalore and Aurangabad. Hence, India in return gets the support of Yemen in platforms like the UN where the former has backed India’s bid for permanency in the UN.
The years-long civil war in Yemen has prevented the development of its oil reserves and natural gas, according to a report by Oilprice.com. "Any war-torn area will not attract any foreign investor to put in high CAPEX for development of its oil reserves and natural gas which has a long gestation period," said Shukla.
Talking about the business perspective, Yemen is close to two key naval chokepoints- the Bab el-Mandeb, which runs between the Horn of Africa and the southern part of Yemen) and the Straits of Hormuz, which is overlooked by the island Socotra. Together, these two chokepoints approach nearly 30 per cent of the world's oil trade as well as different items. Thus, its security is significant for India prompting the two India and Yemen being important for the Indian Ocean Rim Association (IORA) to enhance sea security.
"The impact of the military conflict in different parts of the world says Yemen, Russia, Ukraine will not only affect the Indian economy but the complete global economy. The range of impact depends on how long the war goes on. Due to pandemic, the supply chains are in critical condition and armed conflict will only accelerate the situation to worsen. The companies which are dependent on energy resources are going to get affected more adversely. Reserves will help resolve short-term supply chain disruptions, but If the conflicts persist there will be a shortage of necessities," said Lalit Das, Founder and CEO, 3SC Analytics.
Also, on the economic ground, while Yemen isn't as large a player as Saudi Arabia or Iran, it contains stores of oil and gas which Indian firms like Reliance among others had put resources into vigorously beginning around 2006. While these organisations strip their presence in Yemen because of the political circumstance, the post-conflict potential gives huge economic opportunities for India, according to the experts.
"In 2021 the shipping cost rose over 300 per cent due to the pandemic as borders and ports were sealed globally. Transportation and logistics are key to supply chain management and a wide range of Industries is affected due to it, especially food processing, medical and industrial manufacturing. So we will see a long-lasting effect on the economy and supply chain if the conflict goes on around the world," Das added.
According to the experts, a stable Yemen is good for India because in a war-free country it will be able to expand its economic presence and can increase its activities in the field of oil and gas and agriculture sector.
US-Iran standoff and impact on India:
The long-lasting standoff between Iran and America is known to the entire world. The first shock came when the US declined to renew sanctions exemptions given to eight countries including India to put pressure on Iran to stop its nuclear weapons programme.
America had imposed plenty of sanctions on Iran's oil industry and banks. In 2018 after former President Donald Trump left a nuclear pact that western powers had signed with Tehran in 2015, which permitted Iran relief in return for restricting its nuclear activities, however, had exempted India and some countries from it.
"War brings serious consequences on a nation's economy and affects all sectors. To talk about logistics and SCM, if the world puts sanctions on the exporting country that is at war, the importing country could face problems like price hikes, delays in payments, etc. If the oil prices rise, it impacts the economy on a larger scale. This also leads to an increase in logistics costs and transport. Along with this, it will increase the cost of producing goods and commodities as well," said Sumit Sharma, Co-founder, GoBOLT.
India, which is the world's third-biggest oil consumer, fulfils over 80 per cent of its crude oil needs and around 40 per cent of its natural gas requirements through imports.
Sharma added that if oil prices go high as an outcome of the war, then as per the industry figures, a 10 per cent rise in crude oil adds to an average of 10 basis points in CPI inflation. It also makes an impact on the nation's currency and the stock market.
Sharma said, "War-like situations always lead to substantial damage to the nation. Imagine a situation where a cargo container is carrying grains and other edible items and just because of the war, it has to take the longest possible route possible to reach ports. This is a big loss of time, and compromises the need of the hour."
Recently, India is planning to pay in rupees for its first long-term urea import deal with Iran to minimise the impact of global supply disruptions, higher prices and forex volatilities, according to Reuters.
Due to the tussle between Iran and US and sanctions, Prime Minister Narendra Modi led central government has stopped urea imports from Iran in 2019. After that India turned to China, Ukraine and Russia to meet its demand for the crop nutrient, however, the latest war has generated uncertainties. Hence, India, in order to secure supplies at reasonable price can move towards Iran, according to the reports.
India's fertiliser subsidy bill was at a record Rs 1.5 trillion in 2022 to 21. During 2018-19, Iran however, was India's third-biggest source of urea. It supplied about 17 per cent of India's approximately 7.5 million tonnes of urea imports.
During a past round of sanctions from 2012, India conceived a bargain-like plan satisfactory to America to permit it to make oil installments to the Organisation of the Petroleum Exporting Countries (OPEC) part Iran in rupees through a small state bank. Iran utilised the assets to import merchandise from India.
This assisted India with limiting its import/export imbalance with Iran. Since India stopped oil buying from Iran in 2019, the assets in the local bank drained and the trade deficit with Iran transformed into surplus from 2019 to 2020.
"All economies are deeply connected with each other, and war-like situations could bring implications to the global economy. World leaders should talk and solve the issues to end the war and bring peace to everyone," according to Sharma.
The experts believe that the war in these countries leads to higher oil prices and further to higher inflation. The Reserve Bank of India (RBI) may have changed its stance given inflationary pressure which in turn will lead to rising yields. Which in turn impact the capex cycle and economic recovery, as per experts.