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India fiscal deficit may narrow in 2022 on discounted oil prices from Russia, says GlobalData

The ongoing Russia and Ukraine conflict may present India with an opportunity to import commodities and oil at low prices via a rupee-ruble trade mechanism from Russia. Against this backdrop, GlobalData, a leading data and analytics company, forecasts India’s fiscal deficit as percentage of GDP to decline marginally to 5.3% in 2022 compared to 5.7% in 2021.

Given India’s neutral stance on Russia-Ukraine conflict, Russia is offering oil and other commodities at discounted prices to India. Amid the skyrocketing global oil prices, this will provide relief on the fiscal front as India imports around 80% of crude from other countries.

Gargi Rao, Economic Research Analyst at GlobalData, comments: “India’s attempt to diversify its import sources will tend to reduce financial burden on the government thereby reducing the risk of high import bill. Moreover, cheaper crude may bring down the current cost of production and help cool off inflationary pressures.”

Meanwhile, in the short-term, Indian traders may feel the pinch of higher oil and gas prices along with delays in shipment. Retail inflation is on the rise in India due to rise in prices of fuel and edible oils. GlobalData forecasts India’s inflation to rise to 5.2% in 2022 compared to 5.1% in 2021. However, oil price shocks might wane out with easing of supply bottlenecks and demand adjustment in medium-term. GlobalData forecasts the Indian economy to grow by 7.6% in 2022.

Rao continues: “Both India and Russia are exploring the possibility of using China’s currency yuan as a reference currency to value the rupee-ruble trade mechanism, which would aid a two-way trade. By setting up a new trade mechanism, it will reduce the dependence on US dollars and makes India less vulnerable to sanctions.”

Rao concludes: “High government expenditure has been a cause of concern for India since the start of the COVID-19 pandemic. The skyrocketing oil and gas prices are putting an additional burden on the expenditure front. At a time when global crude prices have risen to their highest levels since 2008, discounted prices for oil from Russia will be a blessing to India.”
Source: GlobalData

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