New Delhi Feb 26 :- Amid the ongoing invasion of Ukraine by Russia, a sustained rise in oil and food prices would adversely affect Asia’s economies through higher inflation, weaker current account and fiscal balances, and a pressure on economic growth. India, Thailand and the Philippines are being seen as the biggest losers, while Indonesia would be a relative beneficiary, Nomura said in a report Friday.
Meanwhile, in a separate report, Icra said impact of excise duty cut on CPI inflation would be muted if such rates are rolled back to pre-pandemic levels, adding that a reduction in excise duty on motor spirit and high-speed diesel to pre-pandemic rates would entail a total revenue loss to the Centre of Rs 920 billion in FY2023.
For every 10 percentage points increase in oil prices, retail inflation of India is expected to rise by 0.4 percentage points and GDP growth is expected to be reduced by 0.2 percentage points, Nomura said. “The negative impact on Asia is predominantly because most economies are net oil importers, and food and energy accounts for nearly half of the consumption expenditure in EM Asia… we see higher inflation as a bigger risk in Thailand (food and energy accounts for 52.7% of total CPI), India (45.9%) and the Philippines (43.4%).”
“Higher oil prices add to freight/transportation costs and higher gas/coal prices add to the utility bill. Relative to oil, the spillover from higher global food prices to local food prices should be more benign, because economies with high food weightings in their CPI baskets are net exporters (Thailand, India) and also due to better food supply and price controls in many economies,” it added.
Most Asian consumers have not yet fully recovered from the pandemic and have lower savings, so higher inflation can squeeze real disposable incomes and weaken the incipient consumption recovery. “The impact could fall disproportionately on lower income households since food demand tends to be inelastic. We also see risk to corporate profit margins, as the entire input cost burden is unlikely to be passed on to consumers. For a 10% oil price rise, GDP growth could be 0.2pp weaker in India and 0.1pp lower in the Philippines and Thailand,” Nomura’s report said.
Icra said a rollback in excise duties on fuel to pre-Covid levels can prevent a major rise in pump prices, thereby softening the impact on the CPI inflation trajectory, albeit at a cost of Rs 0.9 trillion. “If the Centre reinstates the excise duty on MS and HSD to pre-pandemic rates of Rs 19.9/litre and Rs 15.8/litre, respectively, before April 1, followed by the budgeted rise of Rs 2/litre each on unblended fuel in H2 FY2023, we estimate the cess collections in FY2023 at Rs 2.4 trillion, around 27.5% lower than the BE of Rs. 3.35 trillion,” it said.
