‘Slowing growth likely but low stagflation risk’: Department of Economic Affairs

India is expected to witness slowing growth and faces an upside risk to the fiscal deficit owing to the recent excise duty cuts on fuel, but it has low risk of stagflation owing to prudent stabilisation policies, Department of Economic Affairs said in its Monthly Economic Review for May 2022 on Monday. Maintaining growth momentum, restraining inflation, keeping the fiscal deficit within budget and containing the current account deficit while maintaining a fair value of the Indian currency is the challenge for policymaking this financial year, the Finance Ministry report said.

“Going forward, global growth is expected to witness headwinds with rising commodity prices, supply chain bottlenecks and faster than the projected withdrawal of monetary accommodation. Various international agencies have projected a slowing of global economic growth. India’s economy is also expected to witness slowing growth, though still higher than the other emerging market economies,” it said.

The government has taken initiatives to protect growth while pursuing inflation management with the capex budget for 2022-23 expected to provide a “strong stimulus” to growth. “However, as government revenues take a hit following cuts in excise duties on diesel and petrol, an upside risk to the budgeted level of gross fiscal deficit has emerged. Rationalizing of non-capex expenditure has thus become critical for avoiding fiscal slippages,” it said.

Many countries around the world, including and especially developed countries, face similar challenges and India is relatively better placed to weather these challenges because of its financial sector stability and its vaccination success in enabling the economy to open up. “Its medium-term growth prospects remain bright as pent-up capacity expansion in the private sector is expected to drive capital formation and employment generation in the rest of this decade,” it said.

Pointing to the forecasts of real GDP growth being lowered across economies at regular intervals as the outcome of elevated inflation and the tightening of monetary and fiscal policies undertaken to rein-in inflation, the report said that such measures can only address demand-side inflation, while from the supply-side, trade disruptions, export bans and the resulting surge in global commodity prices will continue to stoke inflation as long as Russia-Ukraine conflict persists and global supply chains remain unrepaired. “The world is looking at a distinct possibility of widespread stagflation. India, however, is at low risk of stagflation, owing to its prudent stabilisation policies,” it said.

The recent surge in inflation in emerging market economies is mainly attributable to the supply-side shock arising from the Russian-Ukraine conflict but imported inflation is in respect of only a few commodities on which these economies are net import dependent. “However, with time, imported inflation in EMEs may also spread to other commodities through interlinkages in the consumption basket making retail inflation therein more broad-based,” it said.

Retail inflation in India moderated from 7.8 per cent in April 2022 to 7.0 per cent in May 2022, but has been above the Reserve Bank of India’s tolerance limit of 6 per cent for five successive months.

Retail food inflation has been higher than non-food and the difference may be partly attributed to the onset of summer heat waves as retail vegetable inflation, with a weight of 6 per cent in CPI basket, increased to 18.26 per cent in May 2022, it said. As summer heat waves gradually makes way for the south-west monsoons sending newer crops at the Mandi, food prices and consequently headline retail inflation are expected to decline. Core inflation — the non-food, non-fuel component of inflation — is expected to be sticky due to the pass-through effect of rising input costs translating into higher wholesale inflation passing on to higher retail inflation.

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