India will have to cut fuel taxes or risk both high inflation and slow growth
India will have to cut fuel taxes or risk both high inflation and slow growth
As Russia’s invasion of Ukraine prepares to enter its third week, the economic cost of conflict in Eastern Europe threatens to halt a global recovery shaky by the COVID-19 pandemic. While widespread financial sanctions imposed on Russia by the US and its Western allies have sent the ruble’s value down by more than 60% against the dollar since the start of the conflict, the war-led disruptions to supplies and sanctions have sent Prices of several key commodities are rising: from wheat and corn to metals including nickel and aluminum, and most importantly, crude oil and gas. Brent crude futures hit a high since July 2008, and are currently up about 29% higher than before the attack began on February 24. Natural gas prices in Europe have also risen sharply amid concerns that Russia’s supply will be affected. By closing the tap on Russian energy exports to European countries or agreeing to a US proposal by Moscow for retaliatory sanctions. Russia supplies Europe with about 40% of its gas needs, about a quarter of its oil and about half of its coal needs, and restrictions on energy supplies from Russia could send already high electricity costs in countries in the eurozone skyrocketing. This in turn would affect consumers, as well as businesses and factories, forcing them to either raise prices or possibly temporarily shut down operations.
Inflation in the euro area rose to 5.8% in February, mainly due to a rise in energy prices by more than 31%, and with oil prices rising sharply this week, with price gains in Europe and around the world. The outlook is not encouraging. The IMF, which in January cut its forecast for global growth in 2022, Omicron edition, citing rising energy prices and supply disruptions, warned on March 5 that the war in Ukraine posed serious threats to a global recovery. has created risk. With analysts predicting that crude oil prices will cross $180 and some traders looking at prices above $200 a barrel, India is hardly sitting on its diplomatic fence. In a 2019 paper on ‘Crude Oil Price Shocks on India’s Current Account Deficit, Inflation and Fiscal Deficit’, two senior RBI researchers said a $10 rise in oil price from the $65 level would lead to headline inflation. Will increase by about 49 basis. points (bps) or widening of the government’s fiscal deficit if it decided to absorb the entire oil price shock. India’s policymakers face a tough choice: to bear the cost of lower revenues by cutting fuel taxes or risk both faster inflation and slower growth.