Raw shock: road ahead of India
The global economy could face one of the biggest oil shocks in history. Russian oil exports have plummeted since the country invaded Ukraine. If maintained, sanctions imposed by the United States and other Western countries could lead to a drop in Russian oil transported by sea by 3 million barrels per day, which would be the sixth largest disruption since World War II. , according to Goldman Sachs strategists. Research.
Although India is not directly affected as Russian crude supplies represent only a very small percentage, rising prices around the world amid the Russian-Ukrainian conflict must be controlled as it makes raw materials in all more expensive sections and foods and puts pressure on public finances. A sustained rise in commodity prices can cause the rupiah to depreciate further against the US dollar and negatively impact the investment climate and the flow of most valuable capital into the country at a time when the government has started a massive modernization of infrastructure which requires around 100 rupees. lakh crore. Since India is highly dependent on oil imports, the surge in prices may impact the purchasing power of its households. Food prices will rise along with transportation costs. All of these will have a cumulative impact on inflation, as almost half of the retail price inflation index is made up of food prices. Rising inflation could pinch the pockets of much of the population and lead the Reserve Bank of India to rethink its current pause on interest rate moves.
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India is a big buyer of Russian sunflower oil. Nearly 10% of the national consumption of edible oils is made from sunflower, 90% of which is imported from Russia and Ukraine. Since domestic oil mills have 30-45 days of inventory, escalating tension will affect edible oil prices. A training effect is also observed on other levels of edible oil. Mustard and palm oil prices soared again after a brief respite. Hopes that a new mustard crop in March could cool oil prices are slowly fading. Along with oil prices, freight rates are also rising. Trade associations said container costs had increased 10-fold since the conflict began and war insurance premiums had risen by 5%. Gas prices are another victim of the conflict between the two countries. India imports 2.5 million tons of LNG from Russia’s Gazprom every year. The spiraling crude oil may hamper construction work due to rising costs of coal, steel, aluminum and copper, among others. Prime Minister Narendra Modi’s flagship affordable housing program may not be so affordable anymore. Transport accounts for 20% of total construction costs. This, combined with soaring commodity prices, can delay projects under construction and increase costs.
The auto industry, impacted for a long time, may not see the bright side anytime soon. Mobile phones, consumer electronics and many others that depend on microchips for production will face huge shortages. Palladium and neon are the two important resources in the production of these chips. Russia represents a little less than half of the world’s palladium supplies, Ukraine provides three-quarters of the world’s neon, a key ingredient for the manufacture of chips. Markets can expect the global chip shortage, which began with the pandemic, to worsen if the military conflict continues, according to a report by Moody’s Analytics. Neon prices rose several times during the 2014-15 Russian-Ukrainian war. Moody’s said that although chip companies have been hoarding resources since this shortage and due to high demand during the pandemic, if a deal is not negotiated soon, the chip shortage will worsen, affecting almost all industries like automakers, electronics manufacturers, phone makers, and many other industries that increasingly depend on chips to make their products work.
Russia also produces other commodities for industrial and domestic use. It has 17% of the globe’s natural gas, more than 5% of coal, more than 4% of copper, more than 6% each of aluminum and nickel, 15% of zinc, a little less than 10% of l gold, more than 5% silver, 14% platinum and 11% wheat. India’s imports from Russia consist mainly of mineral fuels, natural pearls and semi-precious stones, fertilizers and 75% of its total imports of animal or vegetable fats and oils, exception of crude and oil. Rough from Russia accounts for about 1% of India’s total rough imports. Last year, India imported 43,400 barrels per day of crude from Russia and 1.8 million tonnes of coal, about 1.3% of its total coal imports.
According to GlobalData, the London-based data analytics and consulting firm, the prices of all of these could rise in the near term. And, according to Kotak Institutional Equities, the growing risks of high and persistent energy prices and their impact on various macroeconomic parameters will remain a dominant theme in the direction of the market in the near term. An average crude price of $120/bbl in 2022-23 could increase average retail price inflation by 80 basis points and negatively impact economic growth. Retail fuel prices, which have not been revised for more than four months, will gradually rise to market prices soon and to insulate the common man from the impact, the government will not only have to reduce fuel excise duty on diesel and gasoline, but also sharply increase minimum support prices for food grains.
In Kotak’s view, the government may also need to spend higher than allocated amounts on rural and social sector programs to provide a buffer to economically weaker households. Macro headwinds could limit the euphoria over the BJP’s victory in the markets assembly election, he said. Although the Center assured earlier this week that there would be no shortage of crude oil in the country due to the war situation, there was no assurance on prices.
“We will ensure that our energy needs are met even though 85% of our needs are dependent on imported crude oil and 50-55% on gas,” Oil and Natural Gas Minister Hardeep Singh Puri said on March 8 during a meeting. of the end of the votes of the Assembly. He however said that Indian oil prices are determined by world oil prices. Oil marketing companies will determine the cost.
As part of their own strategy, oil companies have increased their crude reserves. India’s largest oil company, Indian Oil Corporation (IOC), which controls almost half of the country’s fuel market, recently decided to build nine additional storage tanks to store an additional 10 million tonnes of crude oil at Port Mundra. of Adani in Gujarat. IOC has the capacity to refine 80.55 million tons of crude oil per year into fuel. In the short term, storage can help, but in the long term, other sources of oil must be explored.
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