Global stagflation risk India will have to cut fuel taxes or risk both faster inflation and slower growth A s Russia’s invasion of Ukraine is set to enter the third week, the economic costs of the conflict in Eastern Europe threatens to stall the shaky glo­ bal recovery from the COVID­19 pandemic. While the expansive financial sanctions imposed on Russia by the U.S. and its western allies have sent the value of the rou­ ble plunging by more than 60% against the dollar since the start of the conflict, the war­led disruptions to sup­ ply and the sanctions have sent the prices of several key commodities soaring: from wheat and corn, to metals including nickel and aluminium, and, most crucially, crude oil and gas. Brent crude futures surged to a high not seen since July 2008, and are currently about 29% higher than before the invasion began on February 24. The price of natural gas has also risen sharply in Europe amid concerns that supplies from Russia could be hit either on account of European nations agreeing to a U.S. proposal to shut the tap on Russian energy exports or by retaliatory sanctions by Moscow. Russia supplies Europe about 40% of its gas requirements, roughly a quarter of its oil and almost half its coal needs, and an embargo on energy supplies from Russia could send al­ ready high electricity costs in the countries comprising the eurozone skyrocketing. That in turn would hit con­ sumers, as well as businesses and factories, forcing them to either raise prices or possibly even temporarily shut operations. Inflation in the euro area had accelerated to 5.8% in February, mainly on account of a more than 31% surge in energy prices, and with the uptrend in oil prices stee­ pening sharply this week, the outlook for price gains in Europe and worldwide is not encouraging. The IMF, which had in January cut its forecast for global growth in 2022 to 4.4% citing the Omicron variant, rising ener­ gy prices and supply disruptions, on March 5 warned that the war in Ukraine posed grave risks to the global recovery. With analysts projecting that crude prices will cross $180 and some traders punting on prices surpass­ ing $200 a barrel, India too can hardly be sanguine, its diplomatic fence­sitting notwithstanding. In a 2019 paper on ‘The Impact of Crude Price Shock on India’s Current Account Deficit, Inflation and Fiscal Deficit’, two senior RBI researchers posited that a $10 increase in the price of oil from a $65 level would raise headline inflation by about 49 basis points (bps) or widen the Go­ vernment’s fiscal deficit if it decided to absorb the en­ tire oil price shock. India’s policymakers face a tough choice: bear the cost of lower revenue by cutting fuel taxes or risk both faster inflation and slower growth.