Russia-Ukraine War: How The Conflict Left Global Economy In Turmoil In 2022

Though India’s economy remains resilient and the only bright spot in an otherwise gloomy world, the RBI has hiked repo rate to 6.25 per cent to tame the soaring inflation

The Russia-Ukraine war has already completed 300 days on December 20. On February 24, 2022, Russian President Vladimir Putin ordered his troops to enter Ukraine. Since then the conflict has turned into a full-fledged war with both sides striving to resist each other.

The conflict and new geo-political orientation have shaped up a new global alignment which is disrupting the world economy, including India. The liquidity crisis worsened within the Indian economy. Consumer spending has been reduced as a result of limited access to liquid cash, largely because of the pandemic. Major companies are unwilling to pump in money into the market given the possibility of limited returns, while consumers are unwilling to spend money because of limited access to cash.

With the invasion in Ukraine, prices of essential commodities soared in the post-Covid era. At the same time, India’s annual inflation rate went up to 7.8 per cent in April this year, highest since May 2014. Vanaspati oil, wheat, mustard oil, and sugar were the most impacted commodities because of supply disruptions. The war has directly impacted the price of crude oil. Rise in crude oil prices only exacerbated the already worsening situation.

Brent crude prices stood at around $80 per barrel at the beginning of 2022. Soon after the crisis hit the global economy like a thunderbolt, Brent crude went as high as $128 per barrel. Crude oil prices scaled a new high with Brent crude reaching $122.8 per barrel on May 31.

On the other hand, markets have also been heavily impacted by the ongoing standoff between Russia and Ukraine as foreign portfolio investors (FPIs) pulled out over Rs 1 lakh crore from the Indian markets in the three months since the stalemate began, Rs 50,000 crore more than the combined withdrawal of previous nine months.

Other causes for heavy selling by foreign investors in Indian markets are monetary tightening around the world due to inflation. Foreign portfolio investments (FPI) pullout has led to the depreciation of the Indian rupee versus the US dollar.

The rupee has depreciated nearly 10 per cent this year so far, breaching the key sentiment level of 82 against the US dollar for the first time in history. Weak rupee has also impacted imports adversely, especially oil imports.

India's GDP numbers have also been affected due to the ongoing conflict. According to experts, inflation will be a persistent issue for a while and the economy has been tackling a surge in prices for a while now.

To tame the surging inflation, the Reserve Bank of India’s (RBI's) Monetary Policy Committee (MPC), has hiked repo rate to 6.25 per cent as of now. In the latest MPC meet, RBI Governor Shaktikanta Das announced a 35 basis point hike in the repo rate. The central bank has already lowered the economic growth projection to 6.8 per cent from an earlier estimate of 7 per cent for the current fiscal year. The bank sees inflation 6.7 per cent during FY23 with Q3 at 6.6 per cent and Q4 at 5.9 per cent.

Apart from India, major global economies are battling inflation and recession fears.

A report by the World Bank said the ongoing war in Ukraine has dimmed prospects of a post-pandemic economic recovery for emerging and developing economies in the Europe and Central Asia region.

Economic activity will remain deeply depressed through next year, with minimal growth of 0.3 per cent expected in 2023, as energy price shocks continue to impact the region. So far, however, the region has weathered the storm of Russia’s invasion of Ukraine better than previously forecast. Regional output is now expected to contract by 0.2 per cent this year, reflecting above expectation growth in some of the region’s largest economies and the prudent extension of pandemic-era stimulus programs by some governments, according to a release by World Bank.

It said that Ukraine’s economy is projected to contract by 35 per cent this year although economic activity is scarred by the destruction of productive capacity, damage to agricultural land, and reduced labour supply as more than 1.4 crore people are estimated to have been displaced.

In the US, a potential threat of a recession is making headlines after an over 8 per cent inflation rate was clocked which crossed 40-year highs. The US Federal Reserve has been raising key interest rates to record high to contain the soaring inflation. According to economists, stagflation has not yet hit the US, but if the current situation prevails for a longer time, the US might experience another stagflation after 1970.

Apart from countries, several companies, mostly in the FMCG industry, adopted a mix of both price rise and grammage cuts to tackle inflationary pressure, which is known as shrinkflation. This practice is adopted when there is a soaring inflation in the market.

Hardest hit will be countries with medium to high reliance on natural gas imports for heating (which accounts for 30 per cent of energy demand), industry, or electricity, as well as countries closely connected with EU energy markets.

These countries must prepare for gas shortages and put in place emergency plans to mitigate the worst impacts on households and firms, including saving energy, boosting energy efficiency, and implementing quota/rationing plans. Behaviour change campaigns that focus on heating efficiency in homes and buildings, such as resealing windows and adding insulation, require relatively minimal investment and have immediate impacts.

India’s next door neighbours – Sri Lanka, Pakistan, and Bangladesh – were all going through turbulent times. However, India’s economy still remains resilient and is the only bright spot in an otherwise gloomy world. IMF and other international agencies in their latest forecasts stated that India’s economy is performing relatively well.