How Ukraine-Russia war could fan the flames of inflation in India

Even though the war is being fought 5000 km away, the common man should brace himself as the price of many items like fuel, oil, metals and precious stones are set to rise in days to come. Fuel, cooking gas, sunflower oil, automobiles, petroleum products, gold, precious stones and metals, coal & fertilizers are set to become expensive in days to come

The European Union has already warned that the impact of the Russia-Ukraine war will be painful for the agri-food sector. The pantry staple products such as pasta, flour, and bread are likely to become more expensive in India. Essential commodity that is set to be impacted adversely by the war is wheat

India is rushing to evacuate all its citizens stuck in Ukraine, experts believe the Indian economy will face turbulence in days to come because of the ongoing war. Even though the war is being fought 5000 km away, the common man should brace himself as the price of many items like fuel, oil, metals and precious stones are set to rise in days to come. Fuel, cooking gas, sunflower oil, automobiles, petroleum products, gold, precious stones and metals, coal & fertilizers are set to become expensive in days to come. Amid this ongoing tension, the Black Sea port region -which is an arterial supply route for trade from erstwhile soviet states to Europe and Asia - has also witnessed a halting of operations. Meanwhile, major shipping company Maersk has also halted operations in Russia. The economic sanctions imposed on Russia will impact Indian companies. Defence, tea exports, steel, coal, pharmaceuticals, fertilizer, oil, and gas sectors are likely to face maximum heat.

The conflict has also impacted companies in India. Here are the sectors which are impacted due to the ongoing conflict between Russia and Ukraine:

Oil Sector

Russia is the third-largest exporter of crude oil globally. With the Russian invasion of Ukraine, the crude oil prices soared to a seven-year high of $110 per barrel. On Wednesday, the Brent crude oil benchmark was trading at $110.23 per barrel. Several sectors are crude-oil dependent. These include paint makers, oil makers, and fertilizer companies. India imports 85 per cent of its oil requirements. The Economic Survey 2022 estimated India's Gross Domestic Product (GDP) growth rate at 8.0 to 8.5 per cent in 2022-23, which hinges on crude oil prices being in the range of $70-$75 a barrel. With crude oil crossing $100 per mark, it will have a negative impact on these sectors. It is also bad for the overall economy as it will increase the government's import bills. Moreover, with higher crude oil prices in the international market, the fuel prices will also witness a surge, thus giving a push to inflation further.

Edible Oil

Ukraine and Russia are the major suppliers of sunflower oil. Between November 2020 and October 2021, India imported a total of 18.93 lakh tonnes of crude sunflower oil, of this Ukraine exported 13.97 lakh tonnes and Russia exported 2.22 lakh tonnes of sunflower oil to India. With the ongoing Russia-Ukraine crisis, the demand and supply chain of sunflower oil has been impacted. As a result, edible oil companies are now looking at options to import edible oil from other countries. They are also proposing the usage of other cooking oils such as palm oil and groundnut oil so that the retail prices do not increase.

Ukraine is responsible about 70 per cent of India's sunflower oil imports according to a report in The Deccan Herald. Apart from that, the rising sunflower oil prices could also push the prices up of other edible oils as well. The rising crude oil prices may lead to an increase in the price of LPG cylinders and kerosene as well. The silver lining is that India has a big stock of uncrushed soyabean and a record harvest of mustard is ahead." The prices of sunflower oil in the international market have increased by about 5 per cent to 10 per cent in 8-10 days.

Agriculture Sector

The Russia-Ukraine region is one of the major exporters for some of the key agricultural products globally. The region makes up more than 30 per cent of global trade in wheat, 32 per cent for barley, 17 per cent for corn, and more than 50 per cent for sunflower oils, seeds, and meals, according to Reuters. As the tension between Russia and Ukraine escalates, it has impacted the supply chain of these products. The European Union has already warned that the impact of the Russia-Ukraine war will be painful for the agri-food sector. The pantry staple products such as pasta, flour, and bread are likely to become more expensive in India. Essential commodity that is set to be impacted adversely by the war is wheat. Both Russia and Ukraine are two of the world's largest wheat producers and account for about a quarter of the crop's global production. Any disruption in the global supply of the crop due to war can lead to a steep surge in food prices

Automobile Sector

Ukraine and Russia are amongst the major chip exporters globally. According to a report by Moody Analytics, while Russia supplies the semiconductor industry with important metals such as palladium, Ukraine supplies special gases such as Neon and Helium which are required for chip making. As the ongoing war between Russia-Ukraine escalates, the semiconductor industry is going to bear a massive brunt, with chip-dependent sectors such as the automobile and the IT sectors getting hit badly. Even before the crisis, the world was facing a semiconductor shortage. According to the report, amid the ongoing Russian-Ukraine crisis, the prices for neon gas have surged 10 times, which will potentially impact the manufacturing of automobiles in the Asia-Pacific region.

Base Metals

The prices of base metals are likely to move higher amid the ongoing Russia-Ukraine crisis. "The latest triggers come from Ukraine – Russian geopolitical tensions which have led to sharp volatility in most asset classes. Before this Russia-Ukraine crisis escalated, select metals were already seeing very strong fundamentals and there are possibilities of the United States and its European allies to announce fresh sanctions against Russia. Aluminium has added over 40 per cent gains in 2021 and added 20 per cent gains in 2022," Navneet Damani, senior vice president - commodity & currency research at Motilal Oswal Financial Services said.

"Russia produces around 6 per cent of the world's aluminium and 7 per cent of mined nickel. Sanctions on aluminium maker Rusal in 2018 drove the metal's price up 35 per cent in days. Used in stainless steel and batteries for electric vehicles, nickel, is up around 20 per cent this year having risen 25 per cent in 2021. Lower inventories in metals along with strong consistent demand has been already supporting the backdrop, and with the latest trigger, it looks like the metal has got some more feet to rally," he added.

The ongoing Russia-Ukraine crisis will impact the core sectors of the Indian economy. As the Indian Rupee also witness depreciation against US Dollars, India is likely to witness a surge in prices of products in the coming days.

Russia is the largest exporter of palladium, a metal used in a range of products from mobile phones to automotive exhaust systems. Any disruption in the supply of the metal due to sanctions could lead to a huge disruption in the supply chain of these products, pushing their prices up.

Prices of crude petroleum and natural gas

In 2020, Russia was the third-largest producer of oil, with an estimated production level of 10.50 million barrels per day, according to statistics by the US Energy Information Administration. If Russia and Ukraine do go to war, crude oil and natural gas prices are set for a steep rise. The price of crude oil is hovering around $100 a barrel presently.

India, which imports about 80 percent of its energy needs through oil imports could be one of the worst affected nations in this crisis. Rising energy import prices will also lead widen the country's current account deficit.

Crude-oil related products have a share of over nine percent in the Wholesale Price Index (WPI) basket, according to a report in India Today. The rising oil prices may raise the country's WPI inflation by around 0.9 percent.

Price of electricity

The rise in energy prices will also lead to a surge in prices of electricity production, which in turn will lead to higher electricity bills for consumers.

The demand surge uncorked as covid cases ebbed coupled with supply shortages in domestic production and imports due to the Russia-Ukraine war have increased inflation worries. Consumers will have to brace for unprecedented rise in prices of animal protein including poultry, dairy products, and seafood. Dairy industry leader Amul has increased retail milk prices by 4 per cent starting March 1 in all India markets.