From UPSC perspective, the following things are important :
Prelims level : Export to GDP ratio of India
Mains level : Paper 3- Issues in buying cheaper oil from Russia
With oil above $100, the government now has to spend twice as much to import oil as it did earlier. Russia has offered to sell oil at lower prices to India. It is a hard temptation for India to resist. But one that comes with profound and long-lasting consequences.
Issues in buying oil from Russia
1] Impact on India’s export due to threat of the secondary sanction by the US
- The demise of the Soviet Union made it easier for India to abandon the Soviet-influenced ideology of a planned economy and veer towards the American version of a market economy.
- Now, in the reverse ideological direction, Russia’s offer of cheaper oil has hidden and direct costs that India will have to deliberate upon.
- Whenever global crude oil prices have risen above $100 in the past, India was able to cushion that shock primarily through growth in exports.
- When oil prices were similarly high, exports rose to nearly 25 per cent of nominal GDP, which helped India withstand the shock.
- However, exports now have fallen dramatically to 18 per cent of GDP, which must be revived.
- The US is India’s biggest export market.
- The US has already cautioned India about abetting Russia by buying Russian oil.
- It remains to be seen if the US will impose secondary sanctions against India for buying discounted Russian oil, but that threat looms large.
2] Cascading de-dollarisation
- With US sanctions against Russia, it will insist on payment in rubles.
- If India is forced to accept trading in rubles with Russia, then it is very likely that China, which is India’s second-largest trading partner, may also insist on payments in Chinese yuan.
- Saudi Arabia may also insist on trading in a currency other than the US dollar.
- This cascading “de-dollarisation” phenomenon will further irk and antagonise the US, since it weakens the dollar’s status as the world’s reserve currency.
- If India is forced to purchase Russian oil in rubles and potentially trade in yuan with China and others, it can catapult India into the centre of a geo-economic war that it can ill afford.
Opportunity for India
- The Russia-Ukraine conflict can be an opportunity for India to step up and capture global market share in goods and services.
- There is already talk of India capitalising on wheat exports, albeit a tiny share of India’s overall exports, as a fallout of global sanctions against Russian wheat.
Exports remain India’s biggest hope for a long-term sustainable economic recovery with ample job creation. India cannot risk being isolated in future global trade for near-term discounted oil deals with Russia.