India can partially offset war impact on CAD, says IMF

Chennai: The Ukrainian crisis will lead to higher inflation and current account deficit in India, said the International Monetary Fund. However, the impact on the current account could potentially be partially offset by favourable movements in prices of commodities like wheat.

According to the IMF, the duration of the conflict would be a factor that affects everyone in India. The global economic fallout of the war is expected to negatively impact India's economy through a number of channels, which differ from those impacting the Indian economy during Covid-19.

“The sharp rise in global oil prices represents an important trade shock. With macro-economic implications, it will lead to higher inflation and current account deficit in India. But the impact on the current account could potentially be partially offset by favourable movements in prices of commodities like wheat that India exports,” it said.

In 2019-20, India’s wheat export was worth $61.84 million and this rose to $549.67 million in 2020-21. Wheat prices have surged nearly 40 per cent in a month’s time and have scaled 14-year high levels since the crisis.

The negative impact of the war on the US, the EU, and Chinese economies could dampen external demand for India's exports, while supply chain disruptions could negatively affect India's import volumes and the prices. There is also the question of tightening financial conditions and heightened uncertainty, which can affect domestic demand and the fiscal position through higher borrowing costs.
“In summary, I think there's a great deal of uncertainty around the outlook for India,” the IMF spokesperson said.

However, the impact of the crisis on China could be relatively less. Overall, Chinese exports to Russia are a relatively small share of the total shipments, the IMF said.