The global crude oil price is rising due to the unsettling war between Russia and Ukraine. On Thursday, it reached a nine-year high of $120/bbl. And dollar price went up to Rs.75.91 as against Rs.74.50 on November 4.
India did not account for the current rise in oil prices in its recent union budget. Indeed, it took a conservative estimate of $75/ barrel and worked around it. But, not just India, the fallout of the conflict between Russia and Ukraine on oil prices and its impact on the economy has driven the think tanks of every country into a battle mode.
It is now inevitable that the surge in oil prices will hit the consumers sooner or later. According to JP Morgan Chase, if the Russian oil supply stays disrupted, it will push the Brent crude to $185 a barrel. However, oil companies might absorb the impact on consumers in the short run, and if the price rise persists, the Central and State Governments would consider a tax cut to ease the burden on consumers.
For now, the Government of India is of an assessment that the oil prices would fall once the tensions ease. But, contrarily, if the oil prices continue to stay high, even at $100 per barrel, it will push retail inflation by 60-70 basis points.
Again, increasing farm costs is a concern area. Indian Government may have to spend more on imports and farm subsidies if fertilizer imports are affected due to sanctions on Russia and Belarus.
Russia, Belarus, and Ukraine account for 10-12% of India’s fertilizer imports. Notably, the import of Potash, a crucial ingredient in many fertilizers, will get affected. While Russia and Belarus are leading producers of Potash, India is a major importer of the chemical. Economic sanctions on the two countries will hurdle supply, logistics, and payments.
If the sanctions on Russia include Agricultural products, India may have to shell out more on its imports. Invariably, the Government may also have to increase agricultural subsidies to ensure that farmers don’t face the brunt of price rise.