Some geopolitical experts have already termed the Russia-Ukraine conflict World War III. While Ukrainians are fighting in Europe to protect their motherland, MSME and small business owners in Asia are fighting disrupted supply chains and stuck inventory. The case is even worst for India. The impact of Russia-Ukraine war on the Indian stock market, small-scale industries, and businesses are already evident.
From a hike in petrol and diesel prices to disrupted import-export chains, read how the Ukraine-Russia conflict is affecting India’s already struggling MSME and small businesses.
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Why Ukraine Russia war should worry India?
Let us talk numbers to identify the magnitude of the situation.
- First of all, Russia is India’s 25th largest trading ally. The bilateral trade between India and Russia was a gigantic $3.1 billion during 2020-21. And for India-Ukraine, the bilateral trade stood at $3.1 billion.
- India export goods worth 2.5 billion US dollars to Russia and imports goods worth 6.9 US dollars from Russia during the financial year 2020-21.
- Pharmaceuticals, agrochemicals, automobile parts, and electronics forms a major chunk of USD 2.5 billion; and Indian MSMEs produce a majority of them.
- For India; arms, crude oil, fertilizers, metals make the major chunk of its import bill from Russia.
The numbers tell the story on their own; the ongoing war is worrying especially if it continues. The small scale industries and businesses that are still recovering from the covid-19 are again at the forefront. Needless to say, the disturbed supply chains, banned air spaces, blocked inventory, geopolitical uncertainty, and low consumer demand are all going to adversely affect small businesses.
Impact of Ukraine Russia war on Indian MSMEs and Small Businesses
- Impact on Exports to Russia by Indian MSMEs
The ongoing war and crisis are going to have a domino effect on India’s exports to other countries, even those other than the two at war. The hindrances are already visible in the form of:
- Higher Custom Duties
- Airspace obstructions and high logistic costs
- Delay in shipping and consignment release
- Currency depreciation and Plunge in consumer demand worldwide
Indian MSMEs and small businesses dominate a huge part of India’s exports to Russia and Ukraine. The official data assumes the MSMEs’ share of India’s total exports to be around 49% during the financial year 2020-21. However, these figures are heavily underestimated as they are based on the earlier definition of MSMEs. In 2020, the definition of MSMEs increased the investment in plants and machines to INR 50 crores and turnover to INR 250 crores. Industrial experts believe that the total contribution of MSMEs to India’s total exports based on the new definition will be around 80%. The Russia-Ukraine conflict has potential to adversely impact the small scale industries contributing to major exports of India.
- Import Delays and Disturbed Supply Chains
The disruptions in the supply chains due to the war will impact the imports of coking coal from Russia. In 2021, India imported around 1.41 lakh tonnes of coking coal from Russia, a pretty big quantity. The ongoing turmoil is likely to result in higher prices of coking coal for India. As coking coal is majorly used in steel production, the prices of steel in the Indian market may also increase.
- Higher Transportation Costs
At present, oil prices are at their highest level since September 2014.
India is heavily dependent on crude oil imports from Russia, a whopping 85% of India’s oil come from Russia. As most western nations impose sanctions on Russia, the world’s 3rd largest producer of oil, are bound to have negative effects on the Indian economy.
The dislocations in global oil markets and sanctions on Russia have already resulted in a surge in crude oil prices. Higher crude oil prices mean higher petrol and diesel prices leading to increased transportation costs for businesses and enterprises.
- Credit Guarantee Issues
In order to secure the exporters, Export Credit Guarantee Corporation of India provides insurance against loss in the export of goods and services. The governmental body also provides credit guarantees to banks to provide seamless credit facilities to exporters. However, due to the removal of some Russian banks from the SWIFT network, the ECGC moved Russia from the open cover category to the restricted cover category. While exporters get easy and liberal credit covers for countries in the open cover, ECGC gives specific approvals to exporters exporting to countries lying in restricted categories. The shifting of Russia to a restricted category was crucial for ensuring the payments coming back are safe for exported goods and services.
As the key Russian banks stand removed from the SWIFT system, they can’t process international payments now. This will definitely hinder or delay the payment to Indian exporters via banks isolated from the SWIFT network.
Why Indian Manufacturers Can’t Increase the Costs?
“For Indian manufacturers already recovering from the pandemic, the disruption due to the Ukraine-Russia war is yet another stroke for the stricken.”
The Indian manufacturing industry is not in the position to increase the costs because of 3 key reasons:
- The raw material costs are already high since the pandemic hit the world. The domestic and international supply chains are yet to be completely in power as they were before the Covid-19 pandemic.
- Moreover, neither the markets are ready to absorb the hike in prices, nor the lower and middle-class consumers have the needed buying power.
- The supply-chain disruptions and raw material unavailability have already forced the manufacturing units to operate at 40% lower production capacities as compared to the pre-Covid era. The Ukraine-Russia conflict is nothing but another blow to their hopes of things getting back on track soon.
Overall, the sanctions on Russia and trade disruptions will birth more uncertainties for Indian MSMEs exporting to Russia & Ukraine. Along with higher transportation costs, the higher prices will also be reflected in the trade deficit and currency depreciation causing overall damage to the Indian economy’s fiscal health. India’s exports to Ukraine and Russia have mostly been led by MSMEs and hence, the current crisis may hit MSME exporters with multiple challenges such as delay in shipments, late payments, damage to consignments, and more.
What is next for India?
Continuing its neutral diplomatic stand on the Russia-Ukraine war crisis, India abstained from voting on a UNSC resolution for withdrawal of Russia from war-torn Ukraine. The reasons are quite straightforward. India has friends and foes on both sides of the battlefield. Moreover, just like any other nation, the negative results of the war are visible in the Indian economy. Needless to say, it was going to happen sooner or later. However, the effect of the Ukraine-Russia war on the Indian economy and small businesses is going to be more pronounced than expected, especially if the war goes on for a longer time period.
While Indian banks have almost negligible exposure to Russia, the impact of the Russia-Ukraine conflict on Indian stock market is quite huge. The issue lies just in the export domain as the delay in payments due to the removal of Russian banks from the SWIFT system. Moreover, the emerging challenges disputing world peace and the humongous refugee crisis in Europe will cause significant impacts worldwide.
For the Indian economy, the impacts of the Russia-Ukraine conflict seem to be limited due to the limitations on its trade, financial institutions, and corporate sector.
Watch also: https://www.youtube.com/watch?v=PagdwUO2svQ&t
Written by,
Prasad P. Patkar