Modi govt’s Budget projections may soon become inconsequential under inflationary pressure

The writing was on the wall. Only India’s official economists seemed to have failed to read and report to the government. Oil rally was expected to continue through 2022 as demand outstripped supply. By January 29, this year, oil posted its sixth straight weekly gain as a growing global chorus predicted the price would surpass $100 a barrel. That was well before Russia attacked Ukraine. Speculation was rife about Russia’s attack on Ukraine as early as in November, 2021 and possible punitive US financial and commodity sanctions on Russia

In fact, a Washington Post report late last year said that US intelligence had found that the Kremlin was planning a multi-front offensive as soon as early 2022 involving up to 1,75,000 troops. The Kremlin had been moving troops toward the border with Ukraine while demanding Washington guaranteed that Ukraine would not join NATO and that the alliance would refrain from military activities in and around Ukrainian territory.

All expected that oil prices would soar to unpredictable levels if a Russia-Ukraine war broke out. It did though for a brief period. Chances are oil prices will rise again even if Russia agrees to end the war on its terms.

Unfortunately, India’s government economists responsible for providing direction to the country’s 2022-23 budget, after a prolonged economic slump through 2020 and 2021 due to the Covid-19 pandemic, failed to take the risk factors seriously before working on the 2022-23 budgeted expenditures based on global oil price around $70 per barrel.

Now, the 2022-23 budget proposals look almost infructuous in the face of unstable global oil prices which reached an eight-year high since Russia began a military invasion of Ukraine on February 22. That was barely three weeks after the Indian government presented its annual budget in Parliament for 2022-23.

Global oil price is a very important factor in computation of India’s annual expenditure budget as the country is 86 percent import-dependent on oil. The trade and financial sanctions on Russia by the US have led to high global prices of fuel, food and fertiliser, which Russia exports to the world. Inflation rates are high across the world, including India.

Things may change if the two belligerent nations reach a peace agreement soon and the western sanctions on Russia are lifted by and by. In anticipation, Brent oil price lately ended below $100 a barrel for the first time in three weeks.

Obviously for political reasons, the government is not ready to take any hasty decision on reworking the budget proposals while it is trying to find out how to import highly discounted Russian oil and fertiliser. Because of distance and transportation-cum-insurance problems, India’s oil imports from Russia have so far been well below three percent of its total imports.

India is ready to strike a deal with Russia to import higher quantities of crude oil at “deep discounts”. Russia has agreed to deliver the oil on a c.i.f. basis. That means Russia will nominate tankers. The freight and insurance cost will be inbuilt in the price.

In fact, India should import much more oil from Russia if its landed cost is less than that from Iraq, Saudi Arabia and the UAE. The US has nothing to do with such a decision on India's part. Two weeks ago, Germany opposed banning imports of Russian gas.

For almost 50 years, the world's biggest natural gas exporter has been supplying gas to Germany and other European neighbours — heating homes, powering businesses, cooking food and lighting up streets. Russia supplies gas to countries throughout the EU.

Many in Eastern Europe are even more dependent on Russian petroleum than Germany, which acquires roughly 50 percent of its gas from Russia. Ironically, the US had earlier exempted India from the arms import ban from Russia.

Not only oil, Russia is prepared to supply other commodities, including fertiliser and edible oil, at a good discount. So far, India has positively reacted to these offers. The two countries are examining commercial aspects to make such transactions possible. India is also in touch with Belarus, a Russian ally, for import of cheaper fertiliser. Globally, the prices of food, fuel and fertiliser have been showing a big uptrend since last month.

Even before the Russia-Ukraine war broke out, the global oil price topped the US$90/bbl mark, for the first time since 2014. An earlier Goldman Sachs forecast called for oil prices to hit $100 a barrel later this year and continue to rise in 2023. Goldman sees Brent prices at $90 per barrel in the first quarter of 2022, $95 in the second quarter and $100 per barrel in the last two quarters.

Brent prices may go up further to $105/bbl or beyond in 2023. The Paris-based International Energy Agency (IEA) too feels that global prices for key energy commodities are in the "danger zone" for the majority of developing countries.

On the demand side, crude oil imports by China and India, this year, are expected to go up substantially. China is the world’s largest oil importer. India ranks 3rd, after the US. "China and India will resume their front-line status in being the engines of growth in 2022, but Southeast Asia will also contribute substantially, especially in countries with high vaccination rates," S&P Global Platts Analytics said.

Over January-November last year, India's crude imports rose 5.8 percent year-on-year to 191.8 mmt, or 4.2 million barrels per day (b/d). According to Platts analytics, India's refinery runs are expected to rise by 370,000 b/d to 5.2 million b/d in 2022 amid strong domestic demand as economic activity gains steam. Domestic oil prices will definitely have an impact on the inflationary trend. For now, both the wholesale and retail price inflation rates are on the spike.

Surprisingly, the Reserve Bank of India has been underplaying the inflation aspect, probably to protect the stock market, though consumers are badly feeling the pinch. The latest government report showed the country’s retail inflation rate inched up to an eight-month high in February. The prices are further shooting up in March.

The wholesale price inflation rate remained in double digits for the eleventh consecutive month. Last week, jet fuel prices jumped 18 percent. This was the sixth increase in jet fuel prices in less than three months. It is a matter of time before the prices of petrol, diesel and cooking gas go up.

The RBI has clearly failed to manage inflation, raising risks to growth in Asia’s third-largest economy. India’s central bank seems to have also ignored the OECD’s latest estimate that the Ukraine crisis could knock more than a percentage point off global growth this year and add 2.5 percentage points to inflation.

The government’s project implementation programme is slowing down due to rising costs and inadequate fund allocation. As a result, the unemployment rate, which is already high, is bound to rise further. The budget projections may soon become inconsequential under the inflationary pressure. The situation demands a fresh look at the country’s key macroeconomic forecasts.

(IPA Service)

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