Introduction
Import and export
Trade avenues
Obstacles
Comment
Countries across the world have recently imposed economic sanctions on Russia, such as banning trade relations in certain commodities. Russia is the world's third-largest petroleum and natural gas producer and exporter. The crude oil prices, which were already high, have increased by $100 per barrel. Further, Ukraine is one of the major exporters of agricultural products, which is expected to cause a supply chain disruption and an increase in food prices. The price of gold is also expected to rise, and consequently there will be a hike in the commodity prices, leading to inflation. Despite these facts, many experts believe that this will not create any long-term damage to the Indian economy.
India is likely to witness a rise in inflation due to the rise in fuel and food prices, which are already high. According to a study conducted by Normura Holdings, "[e]very 10% rise in the crude oil prices will shave off around 0.2 percentage point (pp) from the GDP growth and widen the current account by 0.3 per cent". The rise in demand for gold and the high import prices of fuel will deteriorate the balance of payment, weakening the Indian rupee and thereby worsening inflation.
India receives only 0.15% of its natural gas and less than 6% of petroleum and oil from Russia. This is because the Indian refineries cannot process the heavy crudes that Russia exports, and the transportation cost of importing from Russia is higher for India. Major exports to Russia include:
- pharmaceuticals;
- chemicals;
- machinery and electronics;
- coffee and tea; and
- spices.
The major imports from Russia are:
- petroleum products;
- diamonds; and
- minerals and fertilisers.
These imports, however, can be procured from alternative sources. The Gas Authority of India Limited has recently signed a 20-year agreement with Gazprom for the import of nearly 237 million rupees worth of liquified natural gas annually. By comparison, the sanctions that the United States and other countries have imposed so far do not include a ban on fuel and gas imports.
Although the surge in oil prices and the disruption in the supply chain is expected to pose certain risks, on the bilateral front, India will not suffer any major or long-term effects from the war. In fact, India could gain in terms of its exports to the European Union, which is one of Russia's major import partners. With the possibility of limited trade or trade cut off from Russia, the European Union will be dependent on other countries, including India, to fulfil its import requirements. Therefore, the supply chain disruptions in the European Union can open export avenues for India, especially for metal products, such as steel and aluminium. The following are some of the products for which Russia is a major supplier and India can now act as an alternative supplier:
- iron and steel
- wheat;
- medium and light oils;
- aluminium;
- turbojets;
- copper and copper alloys;
- gold and diamonds; and
- fertilisers.
The Federation of Indian Export Organisation has currently asked the exporters to hold off all their consignments that are shipped through the Black Sea. This could have a consequential effect on India's plastic sector, which exports 85% of its products to the Commonwealth and uses the Black Sea trade route for its consignments. Changing this route will increase the freight cost and delivery time, making their exports uncompetitive. India's micro-, small and medium-sized enterprise sector is also worried about the impact of the war, as it is still recovering from the pandemic. As the energy costs increase, the cost of production would also go up, causing further distress to this sector.
On an immediate and short-term basis, many experts believe that after having survived the effects of the pandemic, the world economy will also survive and outgrow the effects of the war. Currently, this war could potentially have positive outcomes for India's bilateral trade and may create new opportunities for Indian producers to act as an alternative supplier for many goods.
The directorate general of foreign trade has set up a helpdesk to support and seek suitable resolutions for international trade issues related to Russia and Ukraine. As government closely monitors the situation, it will also have to make quick decisions to ensure efficient supply chain and to control the spike in oil prices and the resulting inflation. However, the long-term effects and the outcome will highly depend on the duration of the war and can only be determined once it is over.
For further information on this topic please contact Nishtha Gupta, Aastha Gupta or Nihit Gupta at TPM Solicitors & Consultants by telephone (+91 11 4989 2200) or email ([email protected], [email protected] or [email protected]). The TPM Solicitors & Consultants' website can be accessed at www.tpm.in.