If there is something called poetic injustice, Prime Minister Narendra Modi's government may soon experience some soon. While he got away with some of the risky economic decisions he took to stay politically strong, the coming weeks and months may see his administration challenged by something he had nothing to do with: the Russia-Ukraine war.
While the price of oil, as the cliche goes, is on the boil, the timing of the fuel price shock could not have come at a worse time. But before that, there is a plain fact to be acknowledged.
The BJP-led government has enjoyed a seven-year-long honeymoon in oil prices that gave sufficient elbow room for the economy to chug along—and for the government to take some bold decisions, two of which did not work (demonetisation of high—value currency notes and the controversial farm laws) and one that paid handsome revenue dividends (the goods and services tax, GST).
Russia-Ukraine War is Rocking PM Narendra Modi's Boat
When Modi assumed power in May 2014, the global benchmark Brent crude price was about USD115 per barrel and from June, it started falling steadily, see-sawed a bit and touched an amazing low of USD22 a barrel in 2019 when the Covid-19 pandemic struck the planet.
It was kissing USD100 again based on natural market forces and economic recovery in the US and elsewhere when President Vladimir Putin decided to boil the oil. Brent kissed USD139 this week. Its chart shows an unwelcome 'W' shape to a government looking for a 'V'-shaped GDP recovery after the Covid knock.
Now, some are talking of oil at USD200 a barrel and yet others even scaring us with prospects of USD300.
Economists, varied by what assumptions or methodology they use, are talkingof India roughly losing up to one percentage point in GDP growth, and the inflation going equally the other way (up!) and the rupee losing ground in the foreign exchange market (It has already fallen from 76 to 77 rupees to a US dollar—compared with Rs 72.5 a year ago).
But it is wartime, folks. We are in a VUCA phase (volatility, uncertainty, complexity, and ambiguity). Number-toting economists are themselves on thin ice.
How India is Getting Impacted By Sanctions on Russia
Consider some factors that would cause this because the numbers are all up in the air.
US has banned Russian oil imports. Visa, Mastercard, McDonald's, Coca-Cola and other US icons are pulling out of Russia. The SWIFT system through with banks transferred money globally is jammed for Russia. Two million refugees have moved to West Europe from war-hit Ukraine.
Then, India imports loads of farm-sensitive fertilisers and household-sensitive sunflower oil from Ukraine. The Reserve Bank of India is coming under pressure to raise interest rates because the US was already about to do it even as domestic retail inflation kissed 6%—the ceiling signal for loans to turn costlier. The planned share issue to make the Life Insurance Corporation of India go public and raise cash for the government is now utterly VUCA-fied, if I may invent a word for what is going on now in the global economy.
(One shall spare you the what-if-China-attacks-Taiwan question now, though that question lurks somewhere in the minds of risk analysts).
Modi Government Back to the Drawing Board?
It is not exactly fun being the finance minister of India at this point. Nirmala Sitharaman, who bravely announced a spend-and-grow budget to build infrastructure and revive growth-reviving demand at the start of February, found her best-laid plans hit by Moscow's Sukhoi jets by the time the month ended.
She is now for all practical purposes back at the drawing board. You don't want to be in her shoes now. She herself admits that oil is a negative surprise. Her budget calculations were made when oil was about USD85 a barrel.
Maybe we should try some optimism pills on now: If US recovery stalls, American companies may choose to outsource more work to of Indian IT companies, and possibly invest some of the funds pulled out of Russia here. India is also sitting on foreign exchange reserves of USD630 billion - not bad for a country that survived a balance of payments crisis in 1991 and US sanctions seven years later when Pokhran-2 nuclear tests happened. You could say there is a growth shock but not a living-on-the-edge situation.
However, that is hardly what the doctor ordered for Modi, who spoke of making India a 5 trillion-dollar economy by 2024/25—whereas its current size is about USD 3 trillion.
Will Consumers Face the Pinch of Rising Oil Prices?
India imports about 85% of its oil requirements. Oil prices have to be passed on to the consumer as per government intentions, though it may delay, cushion or stagger some of that—depending on how much and how long the shock lasts. But the nasty part is that fuel prices have a knock-on effect on everything from automobile sales to onion prices. Electric scooter-makers may be planning a party somewhere if they see a silver lining in all this.
Traditionally, BJP's strong political constituency of lower-middle-class and poor voters are more vulnerable to price shocks than unemployment. That means even if the BJP looks back in relief after state assembly election results this week, it has to likely fix a two-pronged problem: stagnant economic growth on the one hand and rising inflation on the other. The likely double-engine political team of Yogi Adityanath and Narendra Modi has to now look at a double-drag on the economic side.
(The writer is a senior journalist. He tweets at @madversity. This is an opinion article and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)
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