The Russia-Ukraine conflict portends a reshaping of the world order. Ever since the fall of the Berlin Wall in 1989, a paradigm of free societies, frictionless borders and open economies evolved to be the governing order in many nations.
This catalysed freer movement of people, goods, services and capital across the world. Global trade and per capita GDP nearly doubled in this period, marking an era of general peace and prosperity.
Societies and economies in the world became intertwined closely in the pursuit of shared global prosperity. Such tight inter-dependence among nations will lead to fewer conflicts and promote peace, was the established wisdom.
The Russia-Ukraine conflict has dismantled this wisdom. If inter-connectedness and trade among nations were mutually beneficial, then it follows that its disruption and blockade will be mutually harmful. Retaliatory economic sanctions imposed on Russia have hurt all nations, albeit some more than the others.
Egyptians are reeling from food shortages due to their dependence on Russian and Ukrainian wheat, Germans suffer from high costs of heating in winter due to their dependence on Russian gas, Americans face a shortage of electric cars due to unavailability of car batteries that are dependent on Russian nickel, Sri Lankans have taken to the streets on economic woes and Indian farmers run the risk of high fertilizer prices triggered by a global shortage.
‘Global Village’, a lived reality
‘Global Village’ is not just an academic term but a lived reality for the nearly eight billion people on the planet. This ‘Global Village’ was built on the foundation of advanced transportation networks, cemented with the U.S. dollar as the reserve currency and fenced by integrated payment systems. Any disruption to this delicate balance runs the risk of plunging the ‘Global Village’ into disequilibrium and derailing the lives of all.
India too has benefited enormously from being an active participant in this interconnected world, with a tripling of trade (as share of GDP) in the last three decades and providing vast numbers of jobs. Trade with other nations should and will always be an integral cornerstone of India’s economic future. A reversal towards isolationism and protectionism will be foolhardy and calamitous for India.
The Russia-Ukraine conflict is a global geo-economic conflict that threatens to hark back to the Cold War era of two dominant power blocs. Nations that did not condemn the Russian aggression in the United Nations constitute more than half the world’s population but a quarter of the world economy versus nations that condemned Russia, account for three-quarters of the global economy.
The former, the Russia-China bloc, are large producers with rising consuming power while the latter, the western bloc, are today’s large consumers. Any new curtain that descends between these two blocs and divides them will cause major upheavals to the entwined global economic equilibrium.
A trade opportunity
During the Cold War, when India pursued a prudent foreign policy of non-alignment, trade was a small part of India’s economy. Now, trade represents a significant share of India’s GDP.
India’s trade is dependent on both these power blocs and on the current global economic structures of free trade, established reserve currency and transaction systems. As the western bloc of nations looks to reduce dependence on the Russia-China bloc of nations, it presents newer avenues for India to expand trade.
The western bloc of nations has expressed its desire to embrace a new paradigm of ‘free but principled trade’ that values both morals and money. While one may reasonably quibble about this new doctrine, India, as the largest peace-loving democracy, stands to gain enormously from this ‘principled trade’ aspiration of the western bloc.
It presents a tremendous opportunity for India to become a large producing nation for the world and a global economic powerhouse. However, to capitalise on these opportunities, India needs free access to these markets, an accepted and established global currency to trade in and seamless trade settlements.
The American dollar has emerged as the global trade currency, bestowing an ‘exorbitant privilege’ on the dollar, much to the justifiable consternation of other nations. But a forced and hurried dismantling of this order and replacing it with rushed bilateral local currency arrangements can prove to be more detrimental for the global economy in the longer run.
Needed, ties on either side
Now, with India’s robust external sector, a flourishing trading relationship with many nations and tremendous potential to expand trade, such bilateral arrangements are unsustainable, unwieldy, and perilous. Opportunities to buy discounted oil or commodities may be enticing but if it entails a prolonged departure from the established order of dollar-based trade settlement or jeopardises established trading relationships with western bloc markets, it can have longer term implications for India’s export potential.
In the long run, India stands to gain more from unfettered access to the western bloc markets for Indian exports under the established trading order than from discounted commodities purchased under new bilateral currency arrangements that seek to create a new and parallel global trade structure.
India thus needs not just a non-aligned doctrine for the looming new world order but also a non-disruptive geo-economic policy that seeks to maintain the current global economic equilibrium. By the dint of its sheer size and scale, India can be both a large producer and a consumer.
With rising inflation, volatile crude oil prices, global uncertainty, weak domestic private investment and deteriorating fiscal situation, expanded external trade in the changed global situation presents the best opportunity to salvage India’s economy and create large numbers of jobs for our youth and women.
To best utilise this opportunity, India needs not just cordial relationships with nations on either side of the new divide but also a stable and established global economic environment. It is important for India to adopt a strategic economic self-interest doctrine within the larger paradigm of its non-alignment foreign policy.
Social harmony is a must
Just as it is in India’s best interests to balance the current geo-economic equilibrium, it is also imperative for India to maintain its domestic social equilibrium. To be a large-scale producing nation, India needs millions of factories with hundreds of millions of people of all religions and castes across all States to work together.
Social harmony is the edifice of economic prosperity. Fanning mutual distrust, hate and anger among citizens, causing social disharmony is a shameful slide to perdition.
The reshaping and realignment of the world order will be a unique opportunity for India to reassess its foreign policy, economic policy and geo-political strategy and don the mantle of global leadership. Strengthening India’s global economic might through a cautious geo-economic strategy in the aftermath of the Russia-Ukraine conflict can potentially mark a pivotal turn in India’s economic history.
India can be the fulcrum of this new global order, as a peaceful democracy with economic prosperity.
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.