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Energy War: India caught in global crossfire


On 1st October 1939 Winston Churchill said on the radio broadcast, “I cannot forecast to you the action of Russia. It’s a riddle wrapped inside a mystery inside an enigma.” Eight decades later, the world is facing a similar conundrum while Russia is brutally striking Ukraine.


The pandemic has already left the global economy with two key points of vulnerability — high inflation and volatile financial markets. Aftershocks from the invasion could trigger a series of domino effects that could push the world towards stagflation.


Global Energy Supply

As the US, UK, and allies moved to impose fresh sanctions on Russia, speculation is profound that Russia may respond with a cut in energy supplies. The European Central Bank estimates that a 10 percent gas rationing shock could trim euro-area GDP by 0.7 percent. If the figure is scaled up to 40 percent, the share of Europe’s gas that comes from Russia implies an economic hit of 3 percent.


India, which imports only 2 percent of its crude oil from Russia, makes it less vulnerable to supply disruption. However, the country imports about 85 percent of oil, and 50 percent of its gas needs, hence are susceptible to the global price rise. Fuel prices in India are poised to go up by Rs. 7-8 per liter and any rise in consumption in India would raise the country’s import bill at a time when India is facing one of the deepest budget deficits among major economies.


While some countries, like Saudi Arabia and other Gulf oil exporters, might benefit from price hikes, others like sanctions-hit Iran may see some markets finally opening up for them to fill the supply gaps.


Potential Power Shortages

Russian coal imports into Germany, the Netherlands, and Belgium made up 67 percent of the region’s total coal imports according to Eurostat. What is more, some European coal-fired generation plants are set up to run on Russian-specification products, and so switching to alternative origins may not be a decision made on price alone. So any halt to the supplies is going to disrupt the electricity generation in the region.


In India, fuel costs for electricity-generating companies will go up dramatically and with electricity being subsidized by at least 25 percent, either the government will bear the deficit or the consumers are directly going to face the hit.


Interest Rate Hike

Crude oil-related products have a direct share of over 9 percent in the Wholesale Price Index (WPI) basket. A sharp jump in crude oil prices will pose inflationary, fiscal, and external sector risks. This may prompt the hardening of monetary policy by the world’s central banks, raising the cost of living. Added to the oil effect, which could leave euro-area inflation touching 3 percent by year-end, there might be other spillovers too from a sanctions-induced recession in Russia.


In the U.S., more expensive gasoline and moderate financial tightening would drag on growth. The country may ship more of its natural gas to Europe, raising prices at home. Headline CPI inflation may exceed 8 percent in February and end the year 2022 close to 5percent, compared with the last estimate of 3.3 percent. For central bankers, the twin challenges of managing prices and keeping their economies growing are bound to get even harder.


Read More at https://thesouthasiantimes.info/energy-war-india-caught-in-global-crossfire/

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