MUMBAI: Stating that the almost-fully one-sided trade-deal with the US appears to plaster over the breakdown in bilateral relations and the lack of details means that the Indo-US relationship is far from repaired, economists at Moody’s Analytics have warned that completely stopping Russian oil will have serious fiscal and inflationary impact on the country.
“The trade deal appears to plaster over the recent breakdown in Indo-US bilateral relations, but the lack of details means that the relationship is far from repaired, Moody's Analytics economists Aditi Raman and Denise Cheok said in a note Monday.
Early this month, US president Donald Trump had announced that he has reached a trade deal with New Delhi, and reduced the tariffs to 18% from the previous 50% provided and almost all US goods getting zero duty access to India and New Delhi immediately stopping the intake of Russian oil and also India buying American industrial goods worth $500 billion worth of American energy, IT and communication technology, coal, and other products.
For context, the budget 2027 has total expenditure of around $590 billion only. This purchase demand would amount to a significant proportion of fiscal spending, even if spread over years, they said, adding barring these headlines, the deal details are not shared yet by both the sides. Moreover there is no agreement on the issue of Russian oil so far.
Stating that New Delhi cannot go cold turkey over Russian oil, they said though the US claimed that India has agreed to phase out its imports of Russian oil and replace them with US and Venezuelan crudes, Indian officials have not confirmed that yet, even though major refineries have reduced the intake of Russian crude in recent months.
Crude imports from Russia dropped 27% on-year in September and 34% in October as the key players--Indian Oil and Reliance—have reduced the orders.
“Since the country meets more than 30% of its energy needs from Russia, so a pivot away from Russian crude will be pricey,” they warned, pointing to the fact that crude grade differences could force many domestic refineries, which have been optimised for Russian blends, to bear higher processing costs.
“Also, the EU's latest price cap of $44.1/barrel on Russian crude means that the Urals crude will remain cheaper than US or Venezuelan supplies,” they said.
“A shift will prompt higher domestic energy costs. That will feed through to domestic fuel prices, but also to the fiscal balance, given the country’s extensive fuel subsidies. While some substitution is possible, full replacement of Russian crude appears infeasible in the near term,” Raman and Cheok warned.
The deal lacking details will see the US lowering its tariff rate on Indian to 18% from 25%, which leads to an effective tariff of 15%, helping alleviate to some extent the stress on exports to the county’s largest export market, accounting for almost 18% of total exports.