Context

  • Reports suggest that the crisis in Ukraine will cause hardships to the Indian economy.
  • S&P Global, which is a rating agency, predicts that the rising inflation and borrower stress could impact the ability of companies in India to pay back loans fully.

Editorial Analysis For UPSC IAS Current Affairs Preparation

Impact of Ukraine war on Indian Economy

  • The war in Ukraine has affected the production and logistics of various raw materials and goods.
  • Ukraine is the key source of sunflower oil to India. The war has affected the supplies and this would further affect the prices of edible oils.
  • War in Ukraine has resulted in the closedown of its neon factories that account for nearly 50% of the global supply which is crucial in the production of semiconductors. 
    • This along with the prevailing global chip shortage issues has serious repercussions on car and automobile manufacturing in India.
  • The domino effect on industries’ supply chains will harm the ability of businesses to repay their loans.

Editorial Analysis For UPSC IAS Current Affairs Preparation

Other factors that hinder the ability of companies to repay loans

  • Rise in Oil prices
    • Oil prices are on the rise since the onset of the war in Ukraine.
    • This will increase the prices of petrol and diesel in India resulting in an increase in the cost of transportation.
    • This further leads to an increase in the prices of goods from agricultural produce, raw materials for the factories and finished products leading to inflation.
    • This makes it difficult for the producers to repay their loans as inflation impacts both the demand and profitability of producers.
  • Weakening of Rupee
    • As the exchange rate is affected, importers now should spend more rupees for the same dollar value of imports than earlier.
  • Widening current account deficit (CAD)
    • The growth of imports at a faster rate than exports causes the widening of the CAD.
    • The widening of CAD will further weaken the rupee compared to dollars.
  • Inflation
    • Increase in inflation which is already over the RBI’s upper tolerance limit of 6% will result in an increase in the interest rates.
    • More interest rate means less profit for the manufacturers and retailers.
    • This will further hurt the ability of small and medium enterprises to repay already existing loans. 

Editorial Analysis For UPSC IAS Current Affairs Preparation

Conclusion 

In the Financial Stability Report for December 2021, the RBI cautioned that the Gross Non-Performing Asset Ratio for commercial banks would increase to 9.5% under severe stress by September 2022 from 6.9% at the same time last year (2021). This will impact the credit ecosystem in India, thereby affecting the state of the Indian economy.

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