The article first appeared in Mint on February 24, 2022.
The Russia-Ukraine crisis poses significant challenges for both Finance Minister Nirmala Sitharaman and RBI Governor Shaktikanta Das, as it exerts pressure on India’s economy through surging crude oil price. These global tensions have driven crude oil prices above $100 per barrel, threatening inflation control and fiscal stability in India.
For Sitharaman, the crisis complicates fiscal deficit management and government borrowing. India, reliant on imports for 85% of its oil needs, faces substantial fiscal pressures if crude prices remain high. According to estimates, every $10 per barrel increase in crude prices could raise the fiscal deficit by 0.43% of GDP. The government may need to consider slashing excise duties to absorb the impact, a move that could cost ₹830 billion and widen the fiscal deficit further. Additionally, expensive crude oil contributes to higher LPG and petrol prices, intensifying the financial strain on households and businesses. Despite these challenges, the Union Budget 2023 made no specific provision for cushioning against persistently high oil price, which could amplify fiscal risks.
For Shaktikanta Das and the RBI, the situation undermines inflation projections and monetary policy goals. Retail inflation already breached the 6% upper tolerance limit in January 2023, while wholesale inflation remained in double digits for the 10th consecutive month. Rising fuel prices are expected to drive inflation higher, threatening the credibility of the RBI’s earlier retail inflation forecast of 4.5% for FY23. Elevated inflation also complicates monetary policy decisions, as aggressive rate hikes to control inflation could stifle economic growth.
Adding to the complexities, India’s domestic crude production has steadily declined, reducing its buffer against global price shocks. While gas contracts with Qatar mitigate some risks, the broader economic effects of expensive imports are unavoidable. Persistently high crude prices also risk increasing government bond supply, pushing borrowing costs higher, and straining financial markets.
In conclusion, the Russia-Ukraine crisis presents intertwined challenges for both India’s fiscal and monetary authorities. For Sitharaman, the fiscal deficit and budgetary constraints are pressing concerns, while Das must address rising inflation and its impact on economic stability. Effectively navigating this crisis will require coordinated efforts between the government and the RBI to balance growth, inflation control, and fiscal prudence.
Read more: Mint
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