Praveen Chakravarty writes: India can afford neither trade sanctions nor a geo-economic war over ‘de-dollarisation’.
Praveen Chakravarty
March 29, 2022
Global crude oil prices have now risen above $100 a barrel for the first time in the Modi government’s tenure. (Reuters/File)
The Berlin Wall fell in 1989, the Soviet Union collapsed in 1990 and India ushered in economic liberalisation in 1991. They are not unrelated events, as they may seem. Global geopolitical events can impact domestic policies in profound ways that one may not usually fathom.
At the time of the fall of the Berlin Wall, India’s economy was confronted with a balance of payments and a foreign exchange crisis. Similarly, when the Russia-Ukraine conflict erupted, India was already staring at a fragile economic state with slowing growth, rising inflation, weak demand and tepid private sector investment. The Union budget presented in February 2022 planned to ameliorate the economic situation through increased government spending on infrastructure and other capital expenditure projects. The global conflict has upended these plans.
Global crude oil prices have now risen above $100 a barrel for the first time in the Modi government’s tenure. Low oil prices since 2014 were a big blessing for India’s economy, though much of the windfall was recklessly squandered away by the Modi government. The government collected fuel taxes to the tune of Rs one lakh from every Indian family over the last seven years, which helped shore up government finances. Low oil prices also helped keep inflation under control, ushered in a low-interest rate regime and boosted GDP growth by two to three percentage points between 2014 and 2020.
With oil above $100, the government now has to spend twice as much to import oil as it did earlier. It cannot pass on these high oil costs to consumers amid such rapidly rising inflation and weak demand. So, it will have to bear these costs, which then severely hampers its ability to spur the economy through increased capital expenditure, as planned. Against this gloomy backdrop, Russia has offered to sell oil at lower prices to India. It is a hard temptation for India to resist. But one that comes with profound and long-lasting consequences.
Global crude oil prices have now risen above $100 a barrel for the first time in the Modi government’s tenure. Low oil prices since 2014 were a big blessing for India’s economy, though much of the windfall was recklessly squandered away by the Modi government. The government collected fuel taxes to the tune of Rs one lakh from every Indian family over the last seven years, which helped shore up government finances. Low oil prices also helped keep inflation under control, ushered in a low-interest rate regime and boosted GDP growth by two to three percentage points between 2014 and 2020.
With oil above $100, the government now has to spend twice as much to import oil as it did earlier. It cannot pass on these high oil costs to consumers amid such rapidly rising inflation and weak demand. So, it will have to bear these costs, which then severely hampers its ability to spur the economy through increased capital expenditure, as planned. Against this gloomy backdrop, Russia has offered to sell oil at lower prices to India. It is a hard temptation for India to resist. But one that comes with profound and long-lasting consequences.
Whenever global crude oil prices have risen above $100 in the past, India was able to cushion that shock primarily through growth in exports. In the UPA’s tenure, when oil prices were similarly high, exports rose to nearly 25 per cent of nominal GDP, which helped India withstand the shock. However, exports in the last seven years have fallen dramatically to 18 per cent of GDP, which must be revived. With weak domestic demand, lack of private investment and fiscal bottlenecks to government expenditure, the only viable option for India now is to export its way out of economic misery.
The US is India’s biggest export market. The US has already cautioned India about abetting Russia by buying Russian oil. It remains to be seen if the US will impose secondary sanctions against India for buying discounted Russian oil, but that threat looms large. India’s precarious economy cannot withstand trade sanctions or barriers to exports by other nations in the western world.
There is another issue with buying Russian oil. Typically, when India trades with any nation, it is invoiced and paid in US dollars. But with US sanctions against Russia, it will insist on payment in rubles. If India is forced to accept trading in rubles with Russia, then it is very likely that China, which is India’s second-largest trading partner, may also insist on payments in Chinese yuan. Saudi Arabia may also insist on trading in a currency other than the US dollar. This cascading “de-dollarisation” phenomenon will further irk and antagonise the US, since it weakens the dollar’s status as the world’s reserve currency. The real geo-economic battle in the world today is the “exorbitant privilege” of the dollar that the US is keen to preserve and China to dismantle. If India is forced to purchase Russian oil in rubles and potentially trade in yuan with China and others, it can catapult India into the centre of a geo-economic war that it can ill afford.
Exports remain India’s biggest hope for a long-term sustainable economic recovery with ample job creation. The Russia-Ukraine conflict can be an opportunity for India to step up and capture global market share in goods and services. There is already talk of India capitalising on wheat exports, albeit a tiny share of India’s overall exports, as a fallout of global sanctions against Russian wheat. India cannot risk being isolated in future global trade for near-term discounted oil deals with Russia.
The Russia-Ukraine conflict and China’s unambiguous support for Russia have reshaped the world order once again along two axes, pitted against the US and its allies. The US and China are India’s largest trading partners. New Delhi’s best bet now is to negotiate with all its trading partners equally and extract the best possible support for India’s long-term interests.