IMF Adds To Negative Tone For India's Economic Outlook From Ukraine War

The International Monetary Fund (IMF) said the disruptions to the world economy from the escalating Russia-Ukraine war would negatively hurt Asia's third-largest economy and the widespread worries of the impact of the Russia-Ukraine conflict on the world economy.

"The global economic fallout of the war is expected to negatively impact India's economy through several channels, which differ from those impacting the Indian economy during COVID-19," Gerry Rice, International Monetary Fund's Director of the Communications Department, told reporters.

Mr Rice said the sharp rise in global oil prices represents a vital trade shock with macro-economic implications.

It will lead to higher inflation and a current account deficit; he said as Russia launched what it calls a "special military operation" in Ukraine on February 24. 

The Reserve Bank of India finds itself in a dilemma between slowing economic growth and higher inflation tagged along with the US Federal Reserve set to tighten policy this week.

India's latest inflation data showed price pressures rose further in February to above the Reserve Bank of India's upper end of the 2-6 per cent target band for a second straight month. That was even before the impact of the Russian invasion of Ukraine late last month.

Data also showed the trade deficit widened to $17.94 Billion in February, with higher fuel import bills taking the lion's share, suggesting a further widening from the rise in global energy prices on supply concerns.

That does not cover the surge in crude prices to above $100 a barrel and the spike in costs of a broad range of commodities, driven by supply concerns after Western countries' sanctions and oil import embargo on Russia in response to its invasion Ukraine.

"But the impact on the current account could potentially be partially offset by favourable movements in prices of commodities that India exports, for example, wheat," Mr Rice said.

He added that the negative impact of the war in Ukraine on the US, the EU and Chinese economies could dampen external demand for India's exports. In contrast, supply chain disruptions could negatively impact India's import volumes and prices.

"There's also the question of tightening financial conditions and heightened uncertainty, affecting domestic demand and the fiscal position through higher borrowing costs and reduced confidence," Mr Rice added.

According to the IMF, there's a great deal of uncertainty around the outlook for India.

"In summary, I think there's a great deal of uncertainty around the outlook for India. That uncertainty is clearly I would describe it as elevated and will depend again on the magnitude and persistence of the shock and whether other macroeconomic risks materialise. And of course on the government's policies in response to this difficult situation," Mr Rice said.

On the other hand, the IMF said the immediate impact of the war on China would be less.

"The immediate impact of the conflict on China is relatively small. The higher oil price could affect domestic consumption and investment, but price caps will limit the impact, Mr Rice added.

According to the IMF official, Chinese exports to Russia are a relatively small share of exports overall.

"However, China would be affected if trade partner growth were to slow significantly, serious supply-side disruptions were to emerge, or global financial markets were more severely impacted," he said.

The IMF will release its report on economic outlook next month, and Mr Rice said growth forecasts are likely to be revised down next month.

"That's when we'll be able to offer a fuller picture of the impact of the war for the global economy and developing countries," he said.

The crisis adds to the already tricky trade-offs in Asia, with rising inflation, limited fiscal space and the prospect of rising global interest rates amid high public and corporate debt.

"The severity and duration of the conflict will be a key factor to whether Asian central banks can look past this current rise in commodity prices in China," Mr Rice said.

The US and other Western countries have imposed severe economic sanctions on Russia to punish Moscow for the invasion of Ukraine.