WAR AND GLOBAL RECOVERY.

 According to IMF'S April World Economic Outlook global economic prospects have worsened significantly largely due to Russian invasion of Ukraine causing a tragic humanitarian crisis in Eastern Europe,and the sanctions aimed at pressuring Russia to end hostilities. While global economy was  about to recover from Covid19 pandemic with wide  differences between the recoveries of advanced economies and emerging markets and developing economies, in addition to war,frequent lockdowns in China especially in key manufacturing and export hubs have also caused new bottlenecks in global supply chains. High and more persistent price pressures led to tightening monetary policy in many countries.Consequently risks to economic prospects have increased sharply and policy trade offs became very challenging .

The war in Ukraine which triggered costly humanitarian crisis  demands a peaceful resolution. Economic damage from the conflict is expected to significantly slow down economic growth in 2022. Distressing double digit drop in GDP for Ukraine and a large contraction for Russia are more than likely along with World wide spillovers through commodity markets ,trade and financial channels.  Fuel and food prices have increased rapidly affecting vulnerable population particularly in low income countries . Elevated inflation will complicate the trade offs central banks face between containing price pressures and safeguarding economic growth . As central banks tighten monetary policy interest rates are expected to increase. Moreover many countries have limited fiscal space to cushion the impact of the war on their economies. The invasion has also contributed to economic fragmentation and many countries stopped commercial ties with Russia. Even prior to Russian invasion of Ukraine broad price pressures had led central banks to tighten monetary policy and indicate increasingly hawkish future stances.Accordingly interest rates and asset price volatility had increased in the beginning of 2022 hitting household and corporate balance sheet, consumption and investment. The prospects of higher borrowing costs  increased further leading to spurt in the cost of extended fiscal support. These changes are occurring in many parts of global economy especially in countries with low vaccination rates and poor health care infrastructure. 

The war led to extensive loss of life and triggered biggest refugee crisis in Europe since World War ll in addition to severely restricting global recovery. After a strong recovery in 2021 short term indicators suggest slow down in global economy.IMF have revised projections for World output from 6.1 in 2021 to 3.6 percent both in 2022 and 2023.For Advanced economies as against 5.2% growth in 2021 projected growth for 2022 is 3.3 and for 2023-  2.4.USA grew 5.7% in 2021 as against projected growth rates of 3.7 in 2022 and 2.3 % in 2023.Emerging Market Developing economies which showed 6.8 % growth in 2021 is projected to grow only 3.8% in 2022 and 4.4% in 2023.China grew at 8.1% in 2021 but projected to slow down to 4.4 percent in 2022 and 5.1 percent in 2023 presumably due to lock down conditions. For  India growth rate achieved in 2021 was 8.9% whereas projected for 2022 is 8.2% and for 2023 6.9%.It may be noted here that for 2022 (fiscal year 2022-23) World Bank projected 8% ,ADB 7.5% and Reserve Bank of India 7.2%.Obviously the IMF projections are on the high side.  However for 2023-24 while the IMF projects 6.9 % World Bank expects 7.1% growth for India.While Russia achieved 6.7% growth in 2021 it is  projected to contract-2.9% in 2022 and grow 1.3% in 2023 as against double digit contraction projected for Ukraine by IMF. 

World trade volume growth which was 10.1 % in 2021 is projected to grow 5.0% in 2022 and 4.4% in2023.Advanced Economies whose trade growth was 9.5% in 2021 is projected to 6.1% in 2022 and 4.5 % in 2023.On the contrary emerging market developing economies which showed 11.8 % trade growth  in 2021 higher than advanced economies projected to decline to 3.9% in 2022 and  4.8% in 2023,But in the changed geo political and economic conditions these projections are very uncertain .Egypt who was traditionally depending on Russia and Ukraine for its wheat imports are suffering and now India is attempting to export wheat to Egypt. Americans face shortage of electric cars due to no#39( fertilizer prices. War related interruptions to production, sanctions and impaired access to cross border payment system will disrupt trade flows notably for energy and food. 

Inflation is expected to remain high driven by war induced commodity price increases and broadening price pressures. For 2022 inflation is projected at 5.7% in advanced economies and 8.7% in emerging market developing economies.Inflation is projected at 2.5% for advanced economies and 6.5% for emerging market developing economies In 2023.Energy and food prices were already major contributory factor in headline inflation in 2021.The sharp spike in oil and gas prices reflecting tight fossil fuel supply led to significant increase in energy costs. With regard to rising food prices poor weather conditions hit harvest in addition to rise of oil, gas and fertilizer prices. Global growth momentum has been disrupted by persistent inflation, supply chain constraints, volatility in energy markets, consumption constraints and investor uncertainty. Monetary tightening  by central banks in advanced economies threatens to cause huge capital outflows from developing countries, in turn leading to currency depreciation and further inflationary expectations. It is estimated India's inflation to average 6.1% in 2022-23 higher than RBI's upper tolerance level of 6% .Quite alarmingly India's retail inflation climbed to a 17 month high of 6.95% in March 2022 and whole sale price index stood a four month high of 14.55% in the same month.

 Russian Ukraine war is particularly challenging for net oil importing countries like India. As indicated emerging market developing economies find it very difficult as their economic  recovery from the pandemic remains incomplete even as inflation strikes. Central banks in these economies face the difficult trade off between containing inflation and nurturing economic growth.While the risk to domestic growth call for continued accomodative monetary policy, inflationary pressures necessitate monetary policy action. However circumstances warrant prioritizing inflation, anchoring inflationary expectations and safeguarding macro economic and financial stability, along with achieving higher growth. According to IMF Indian policy makers need to focus smoothening interest rate hikes, spur consumption, manage fragile fiscal position,currency fluctuation and volatile foreign capital flows. Rapid growth is possible for India according to IMF provided there are reforms in the financial sector to get credit going strongly again and labour market reforms to support greater labour force participation and employment. India has to pay attention to food security to households in pain.  Government has to prioritise food security and expand cash transfers to vulnerable sections so they don't suffer in the wake of the crisis. It may be noted here that while debt ridden economies like Sri Lanka require special packages, crisis has also brought new opportunities for India to export food grains to different countries and also to some extent manufactured goods.