Indian economy: Winters in Europe could cool Indian economy

Russia invaded Ukraine on February 24, 2022. The West has since imposed multiple sanctions and, in fact, Europe is now suffering from the worst energy crisis in 50 years. Soaring gas prices are pushing economies to the brink of recession and as a result, India is set to suffer, says Swaminathan Aiyar, Editor-in-Chief, ET Now.

India imports more than 80% to meet its crude needs.

India, a “victim”

India’s merchandise exports fell by 1.15% to $33 billion and the trade deficit more than doubled to $28.68 billion as imports increased by 37%. India is a major importer of oil, liquefied natural gas and coal, and prices for all these products have risen sharply.

“India’s trade deficit is now at something like $30 billion a month, which is a crippling and unsustainable amount. So we are suffering in a major way. It’s not just Europe that is suffering,” Aiyar said.

In an effort to cripple the Russian economy, which is largely powered by the sale of fossil fuels, the European Union has chosen to impose huge sanctions and pledged to eventually stop buying Russian gas.

However, as a result, gas prices across Europe have skyrocketed in recent months. The average European household will face a monthly energy bill of 500 euros ($494) next year, triple the amount in 2021, according to Goldman Sachs analysts’ estimates.

“If this kind of thing continues for 12-13 months, our foreign exchange reserves will be under enormous pressure. So there are consequences for India as well,” Aiyar said.

Valeriy Zaluzhnyi, Ukraine’s top military commander, warned in an article that Russia’s war against Ukraine will likely continue into next year.

“It’s a bleak scenario in the next 12 months. I don’t see either side giving up easily in the next 12 months and it’s bad for the global economy and it’s bad for the Indian economy,” Aiyar added.

Concern for India

Deutsche Bank said in a note that it expects India’s trade deficit to reach $300 billion in the current fiscal year, pushing the current account deficit to around $140 billion. , or 3.9% of GDP. As a result, global foreign exchange reserves are also expected to deplete further.

“If the current account deficit does indeed reach $140 billion, the overall BOP (balance of payments) deficit could reach $80 billion in FY23, as we expect a capital account surplus of about 60 billions of dollars,” said Kaushik Das, chief economist, India and South Asia, Deutsche Bank.

Given a decline in reserves due to valuation changes, the current year deficit could reach $100 billion to $105 billion, Das said.

A decline in exports and an increase in imports widen the trade deficit, which puts pressure on the value of the national currency.

India’s attempts at diversification

India sources 65% of its crude needs from the Middle East. India has stepped up its purchases of cheap Russian oil in recent months despite Western sanctions.

Finance Minister Nirmala Sitharaman said on Thursday that importing Russian oil was part of India’s inflation management. In late July, Prime Minister Narendra Modi’s cabinet approved a $1.6 billion investment proposal to develop an oil bloc in Brazil with the aim of procuring equity oil from abroad.

However, analysts have stressed that import-dependent nations should be wary of the developing situation in Europe.

“Anyway, the recessionary trend was coming and that was further exacerbated by this particular energy crisis. I would say there will be maybe a 12 month recession period and that will be one of the hardest I see a lot of pain ahead, it’s not easy to see Russia backing down or the West backing down,” Aiyar warned.


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