Indian economy: A harsh winter for Europe, a test of resilience for the Indian economy

India, like other emerging economies, is not expected to emerge unscathed from heightened uncertainty in European markets following the sharp cut in gas supplies from Russia.

The latest flashpoint is the rupture of the Nord Stream 1 gas pipeline which supplies around 35% of all gas to Europe from Russia. Moscow and the West have traded accusations over what is believed to be an alleged act of sabotage.

Nord Stream 1 flows under the Baltic Sea and is a key Russian gas supply link to Europe.

Russian gas giant Gazprom has reduced gas deliveries through Nord Stream to just 20% of pipeline capacity from mid-June. It completely stopped supplies at the beginning of September. The West has accused Russia of weaponizing energy.

The International Energy Agency (IEA), in its latest report, said market tightening is expected to continue through 2023 due to rising international gas prices impacting trade flows and is putting acute pressure on emerging economies.

“Russia’s invasion of Ukraine and the severe reductions in natural gas supplies to Europe are causing significant harm to consumers, businesses and entire economies, not only in Europe, but also in the emerging and developing economies,” said Keisuke Sadamori, IEA Director of Energy Markets and Security.

Europe has sharply increased its LNG imports following the reduction by Russia. LNG demand increased by 65% ​​in the first eight months of 2022 compared to the previous year. This has led to turmoil in international markets, as emerging economies also draw their gas needs from the same reservoir.

Prices have skyrocketed and this has hurt demand in all sectors using gas as an input. Power generation in emerging economies has also been affected. It also led to a shift to other fuel sources such as coal.

“India’s gas consumption for power generation fell nearly 30% in the first eight months of 2022 amid rising LNG spot prices, with much of the gap being filled by coal-fired power plants,” the IEA report said.

India, which imports about half of its LNG needs, has felt the impact of soaring international gas prices. The government has revised gas prices upwards by 40% from October 1 to March 31. The government reviews gas prices twice a year – from April 1 to September 30 and from October 1 to March 31.

Retail CNG prices were immediately raised from Rs 6 per kg to Rs 86 per kg in Mumbai by Mahanagar Gas Limited citing the upward price revision. Piped Natural Gas (PNG) prices have been increased from Rs 4 per SCM to Rs 52.50 per SCM.

Harsh winters ahead

The onset of winters will add to turmoil in international markets as European nations jostle for gas supplies. Prices are expected to remain high and complicate RBI’s efforts to control inflation. RBI Governor Shaktikanta Das in the latest monetary policy review said retail price inflation is expected to reach the 4% target over the next two years.

The weak rupiah will make gas imports more expensive and increase raw material costs.

“With natural gas representing more than 35% of the energy mix of the main European economies, the onset of winters should increase the demand for natural gas over the next two months. While we have already seen an increase in supply from from the United States and the Middle East over the past few months, Crisil Research estimates that any further diversion of cargo from Asian consumers (who are bound by long-term agreements) should further drive up LNG prices through November. 2022 at least, significantly increasing the cost of supplying LNG cargoes for India and aggravating inflationary pressure,” said Hetal Gandhi, Director of CRISIL Research.

Rising gas prices will affect fertilizer prices, as it is one of the main inputs in its production. The government could increase fertilizer subsidies to prevent further price increases. This could increase the burden of subsidies and harm the government’s budget calculations.

“For the fertilizer sector, which operates on a gas pooling mechanism, this price increase is expected to significantly increase the burden of government subsidies (already revised up to INR 2.15 Lakh Crore from INR 1.1 lakh Crore in the last financial year).The high commodity prices, coupled with a weakening rupee, are expected to significantly increase raw material costs for key consumer sectors and add to the current inflationary pressure on the economy,” said added Gandhi.

The worries don’t end there. Rising gas prices globally could lead to a slowdown in the industry in developed economies like Europe. This will impact our exports and reduce some of the economic growth even though India is expected to be the fastest growing economy.

The coming winters will be harsh for Europe but they will also test the resilience of the Indian economy.


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