Oil Price Surge Will Hit South Asia Hard
As net importers, the region’s countries are particularly vulnerable to shocks from sanctions against Russia.
Welcome to Foreign Policy’s South Asia Brief.
Welcome to Foreign Policy’s South Asia Brief.
The highlights this week: India’s Bharatiya Janata Party wins big in Uttar Pradesh, the Islamic State-Khorasan threatens security in Pakistan, and India moves to end a ban on international air travel.
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Oil Price Surge Could Hit South Asia Hard
The world is reeling from the economic implications of the sanctions regime against Russia, and at first glance South Asia seems to have caught a break. The region trades in arms, tea, and wheat with Russia, but its overall commercial links to the country pale in comparison to those with China and the West. There isn’t much Russian foreign direct investment flowing into South Asia, and the region won’t suffer devastating commercial losses in the event of Russian economic freefall.
However, all eight South Asian countries are net oil importers, making them vulnerable to the massive surge in global oil prices spawned by sanctions against Russia. This surge could hit South Asian economies especially hard because of preexisting pandemic-induced shocks and skyrocketing inflation—and because governments are likely to respond with politically advantageous fixes that work only in the short term.
The last time oil prices were this high was during the 2008 global recession. Then, South Asian economies bounced back relatively quickly. This time around, pandemic lockdowns and supply-chain breakdowns have affected regional growth. India had one of the world’s lowest growth rates, -7.3 percent, during fiscal year 2020—compared to five years of 8 percent growth leading up to the 2008 global recession, as Kaushik Basu, a former chief economist at the World Bank now teaching at Cornell University, pointed out to me this week.
High oil prices could also cause spikes in food costs in South Asia—already rising in previous months, in part because of fertilizer shortages. The problem is cyclical: New energy price shocks could drive up costs in the energy-intensive fertilizer sector, raising the costs of domestically produced food and heightening inflation.
South Asian governments will feel domestic pressure to respond with measures that bring short-term relief but ultimately prolong economic stress. Excluding Afghanistan, most South Asian countries have national elections in the next two years, and governments have strong political incentives to announce new subsidies or price cuts. Such moves could worsen inflation and debt. But the more economically prudent policy—austerity—is politically imprudent.
Late last month, Pakistan’s government, reeling from high inflation, announced gas and electricity price cuts. Pakistan has elections in the spring of 2023, although a no-confidence vote for Prime Minister Imran Khan is expected later this month. Meanwhile, Sri Lanka’s economy, done in by debt and a decimated tourism industry, is arguably the worst performing in the region, and its government may be the next to cut prices to appease public anxiety.
There is a potential silver lining. An economist who covers South Asia pointed out to me that high oil prices could accelerate the region’s transition to more clean energy use. However, the price surge could also have the opposite effect, prompting countries to draw more aggressively on indigenous fossil fuel supplies to address immediate energy needs.
This week, economist Pranjul Bhandari released a paper estimating what could happen in India if oil costs average $100 per barrel for an extended period of time. She forecasts a nearly 1 percent GDP decrease, a 1 percent rise in inflation, and a current account deficit increase of 1.2 percent. And India is a country that has shown some signs of economic recovery in recent months. Effects on the sputtering Pakistani and Sri Lankan economies could be even greater.
Basu, the Cornell economist, fears the worst. South Asia has “no choice but to take a brace position,” he said. The region’s best hope may be that external demand and supply adjustments—less oil use in the West amid warming weather, increases in supply—eventually bring down prices and deliver some much-needed relief.
What We’re Following
Indian state election results. The ruling Bharatiya Janata Party (BJP) will retain control in Uttar Pradesh, India’s most populous state. The party won more than 270 of 403 seats. This is a major achievement for the BJP: Anti-incumbent sentiment is a powerful factor in Uttar Pradesh. Yogi Adityanath will be the first incumbent Uttar Pradesh chief minister to return for a second term in 40 years. He has positioned himself to succeed Indian Prime Minister Narendra Modi, who is still eligible to run again in 2024.
The BJP was also expected to hold on in three other states where it is currently in power: Goa, Uttarakhand, and Manipur. In Punjab, the one state with elections not under BJP control, the winner was the Aam Aadmi Party, which runs the New Delhi local government but has never gained control elsewhere. It can now shed the label of a “Delhi-only” party.
Another big takeaway: the continued struggles of the Indian National Congress party, which only mustered a few seats in Uttar Pradesh and fewer than two dozen in Punjab and Uttarakhand, its best-performing states. India’s largest opposition party couldn’t capitalize on the issues that made the BJP vulnerable in these states, including unemployment, communal rhetoric in areas with many Muslim voters, and the BJP’s poor handling of the coronavirus pandemic.
Islamic State strikes Pakistan. On Friday, Islamic State-Khorasan terrorists attacked a Shiite mosque in the Pakistani city of Peshawar, killing 63 people. It was one of the deadliest terrorist attacks in Pakistan in years. On Tuesday, the group claimed responsibility for another deadly attack in the province of Baluchistan, which killed six security personnel.
Terrorist violence in Pakistan has fallen since 2014, when counterterrorism offensives weakened anti-state militants. But the country has seen a sharp rise in attacks in the last year, thanks in great part to the resurgence of the Tehrik-i-Taliban Pakistan, or the Pakistani Taliban. The Islamic State-Khorasan attacks, however, serve as a reminder of other threats. The group’s leadership is in neighboring Afghanistan, and it has gained strength since the Taliban takeover last August.
Taliban prison breaks last summer freed dozens of fighters from the Islamic State-Khorasan, and the departure of U.S. forces means the group no longer faces airstrikes. It has a strong incentive to carry out attacks in Pakistan, given Islamabad’s close ties to the Taliban, a bitter rival.
India drops air travel ban. On Tuesday, India’s Civil Aviation Ministry announced that the country will resume international flights on March 27, following a two-year ban due to the pandemic. Limited international flights did take place through separate bilateral arrangements between India and 37 partner countries. (The end of the ban will eliminate these special arrangements.) A ministry statement said that “increased vaccination coverage across the globe” prompted the decision.
Quote of the Week
“Are we your slaves and will do whatever you tell us to do?”
—Pakistani Prime Minister Imran Khan, reacting to a statement by European Union ambassadors in Islamabad that calls on Pakistan to condemn Russia’s invasion of Ukraine.
Under the Radar
Since Russia’s invasion of Ukraine last month, Sri Lanka has become a haven for stranded tourists—both Russians and Ukrainians. The island nation is a top tourist destination for both countries, and as of the end of February, there were nearly 11,500 Russians and 4,000 Ukrainians in the country. Closed airspace now prevents many of them from flying home, and some Ukrainian families don’t want to bring their children back to a war zone. Sri Lanka’s government has extended the visas of many of these tourists at no charge.
Consequently, Russians and Ukrainians have found a sanctuary together far from home. Sri Lankan media have published pictures of smiling tourists from the two countries sitting together at lodging facilities known as homestays. One homestay owner told a local media outlet that “they all get along fine. They talk, eat and drink together. No one talks politics.” Police report no confrontations.
Unfortunately for Sri Lanka, there’s a gloomy side to the story. The government may hope that extending the stays of thousands of foreign tourists could deliver a major boost to a tourism-dependent economy going through one of its worst crises in years due to the pandemic and inflation. But many Russian tourists can’t withdraw additional funds in Sri Lanka due to sanctions and have received free lodging from their sympathetic hosts.
It’s also unlikely Sri Lanka will see fresh influxes of Russian tourists, who make up the country’s biggest market. Sri Lankan officials will be deprived of the tourism revenue that they badly need at such a difficult economic moment.
Writer Aveir Alam argues in the Dhaka Tribune that Bangladesh, which abstained from a United Nations General Assembly resolution on Russia’s invasion of Ukraine, should take a stronger stand against Moscow’s actions. “We are standing by and watching a nation with the same core values as us be overrun by unprovoked aggression and territorial ambition,” he writes.
Start-up founder Simran Khara, writing for News 18, poses a question about women workers in India. Amid rising female labor force numbers abroad, “[W]hy is it that fewer women [in India] seek work despite rising education levels, more opportunities to work, and an improving environment for work?”
Dawn columnist Huma Yusuf warns that a recent attack on a Shiite mosque in Pakistan could be an ominous sign for the future. “It reveals that the social and political fissures that prevented swift actions against militancy around a decade ago still run deep,” she writes.
Michael Kugelman is the writer of Foreign Policy’s weekly South Asia Brief. He is the director of the South Asia Institute at the Wilson Center in Washington. Twitter: @michaelkugelman
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