Implications of short-term gain of cheap Russia oil must be weighed

Last week, the government extended the current Foreign Trade Policy and Procedures by six months and the exemption from Integrated Tax (IGST) on imports under some export promotion schemes such as duty exemption scheme etc. by three months. The President gave his assent to the Finance Bill 2022 after it was passed by the Parliament. India, some of its neighbouring countries and Thailand discussed closer cooperation in trade related matters. India aided Sri Lanka to help tide over its economic crisis. 

The government companies raised the prices of petroleum products. The estimates of the current account deficit during the year 2021-22 worsened to about 2.7% of the GDP due to increased imports. Indian traders tried to take full advantage of the high prices of food grains due to global supply disruptions. However, all these developments were overshadowed by the question of whether India should increase its oil and coal purchases from Russia under bilateral rupee payment arrangements.

Last week, the prospects of global economic slowdown somewhat moderated the oil and commodity prices. The United States released oil from its strategic reserves to increase the supplies and thus bring down the prices but still the oil prices hovered around US$ 100 per barrel. The lockdowns in Shanghai and other provinces in China disrupted the shipping operations and the global supply chains again. The shipping lines raised the freight rates. Russia threatened to cut off oil and gas supplies to Europe unless payments are made in Russian Roubles. Uncertainty prevailed as Europe refused to pay in Roubles.  

India is faced with the choice of short term gains from support to Russia and long term gains from support to the western alliance led by the United States.  Military hardware from Russia is essential for our defence preparedness. Cheap oil from Russia can help the economy cope with potential inflation. 

Energy has been kept out of the sanctions imposed by the United States and its allies and so, many European countries, especially Germany, have not stopped their purchases of oil and gas from Russia. 

Therefore, they cannot object to India’s purchase of oil from Russia, says India. However, the United States has warned that there will be consequences if India does so. Also, India’s stand can weaken if Germany is willing to or forced to do without Russian gas and oil.

India’s economy is strongly integrated with the western world. Most of foreign investments in India are from the western companies. Exports of merchandise and services, especially by companies in the Information Technology sector, are mostly to the United States and its allies. Most of our companies source technical know-how from the western countries. Our financial sector is closely intertwined with the companies in the western alliances. Our government is trying to negotiate free trade deals with Australia, European Union and United Kingdom. Trade with Russia is not significant.

With a belligerent and powerful China trying to increase its influence in Russia, Pakistan and other countries in our neighbourhood, the role of Quad, the loose coalition between India, Japan, United States and Australia, has become quite crucial. In the longer run, the threats from China can be better countered by strengthening the Quad.

So, India should carefully weigh the short term gains of buying cheap oil from Russia against implications of annoying the western alliances.

email:tncrajagopalan@gmail.co