The Reserve Bank of India (RBI), in its Monetary Policy Committee (MPC) meeting on 6 April 2022, projected India’s real GDP growth for FY 2022-23 at 7.2%.
More ominously, the RBI’s projections underlined the precariousness of India’s GDP growth in India as the central bank projected a drastic slowdown after the bumped-up growth of 16.2% in the first quarter (largely on account of negative/beaten-down growth in the first quarters of the last two years) to 6.2% in the second quarter, 4.1% in the third quarter and only 4% in the fourth quarter.
If the RBI expects only 4% growth in the second half of FY2022-23, how can anyone else be sanguine about rapid growth?
RBI Is More Optimistic About Inflation
The RBI was, however, more optimistic about inflation at the Monetary Policy Committee (MPC) meeting.
The consumer price inflation (CPI) for 2022-23 was projected at 5.7%, after factoring in the impact of the Russia-Ukraine war and the global inflation inferno unleashed the world over due to a demand upsurge caused by ultra-loose monetary and fiscal policies pursued post the COVID-19 pandemic, widespread supply disruptions and jacked-up price of oil and gas.
The March CPI reading, released a week after the MPC meeting, came at 6.95% – much higher than RBI’s projections. The wholesale price index (WPI) for March 2022, released a few days later on 18 April, announced inflation at an unnervingly high level of 14.55%.
The CPI captures inflation in consumer goods like food, fuel and some services, whereas the WPI captures inflation in investment goods and commodities at the producers’ end. As inflation in a whole lot of goods captured by the WPI does not figure in the CPI, the average of CPI and WPI taken together can capture the economy-wide inflation better. That reading exceeds 10.75% – a seriously high level of inflation for the Indian economy, industry and people.
While several factors underlying the growth-inflation scenario for FY2022-23 are not in the control of the government, right policies can make a critical difference.
Inappropriate policies can accentuate inflation and deflate the growth momentum.
Food Inflation Can Bite
The agricultural growth has been steady at about 4%-plus even during the pandemic years. Food price inflation has been quite low, with bumper cereal production (much in excess of India’s domestic demand) and India’s inability to export wheat (global over-supply and India’s higher prices).
The Russia-Ukraine war has changed the global wheat trade. India exported about 7.5 million tonnes of wheat in 2022-23 (mostly in the last quarter) as the Russia-Ukraine wheat disappeared from the global market and wheat prices rose.
The rising global prices and exports have led to domestic wheat prices rising over the MSP in most states. Private trade is buying more wheat from mandis than the government.
Government policies have been supportive of wheat exports (Indian farmers will feed the world, said the Prime Minister). It might be no surprise if India ends up exporting 20-25 million tonnes of wheat in FY2022-23.
While this is good for India as excess wheat stock with the Food Corporation of India (FCI) will get rebalanced, the CPI will witness much higher food inflation. Higher imports of edible oils and pulses in 2022-23 at relatively higher prices (India benefits from the global demand-supply mismatch in wheat but loses out for the same reason as in the case of edible oils and pulses as it imports these commodities) will aggravate inflation further.
India's Divergent Policy in Oil, Gas and Fertilizers
India has to import considerable quantities of oil, gas, and fertilizers. For the last many months, the OPEC-Russian cartels have been successful in calibrating the supplies in such a way that their prices were higher ($80-85 per barrel in case of oil).
The Russia-Ukraine war has further disturbed the demand-supply balance. It is unlikely that India’s average import price will be lower than $100 a barrel for the year 2022-23. Likewise, the prices of gas and fertilizers are likely to remain elevated.
Indian policy has been quite divergent in the case of oil, gas and fertilizers.
While the government raised excise duties on diesel and petrol in May 2020 by whoppingly high amounts when the global oil prices crashed, the incidence of excise duties today remains higher than pre-May 2020, despite some reduction before the recent Assembly elections. Post-elections, oil companies have passed on their higher import costs to consumers.
In the case of fertilizers, the government continues to absorb the import-price impact and has kept farmers’ prices unchanged.
In the case of gas and LPG, the government has neither budgeted nor indicated any intention to recommence subsidies that were earlier provided to consumers until FY2020-21.
Consumers are Feeling the Heat of Rising Fuel Prices
The government’s unwillingness to reduce excise duties on diesel and petrol has led to transportation costs shooting up, causing all-around discomfort.
Trucks have increased freights, but taxi drivers have not been successful as their fares are regulated. They are resorting to agitations.
Consumers are cutting down on the consumption of petrol and diesel. In the first fortnight of April, the consumption of diesel and petrol went down by 10% and 15.6%, respectively, month-on-month.
No doubt there will be a substantial inflationary impact of fuel prices. If the government decides to reduce excise duties (Central and state taxes make up more than 50% of the final prices), it will affect its finances adversely, which affect the government’s infrastructure push (investment in roads and railways is financed out of excise revenues), thus adversely impacting growth.
The government budgeted fertilizer subsidies at Rs 1.05 lakh crore for FY 2022-23. New estimates suggest that the fertilizer subsidy bill might exceed Rs 2 lakh crore.
The government has decided to extend the free foodgrains scheme (5 kg wheat/rice per person) for the first half of FY2022-23. The food subsidy bill is likely to shoot up by another Rs 1 lakh crore.
The RBI Is Likely to Tolerate Inflation
Extra expenditures will force the government to keep the high borrowing programme unchanged despite expected higher revenues from GST and income taxes.
The RBI’s dovishness on inflation is partly explained by its intent to get the government’s large borrowing programme subscribed at low interest.
The central bank is likely to keep the liquidity abundant by mopping up government papers from the market. This policy will, however, stroke the inflationary expectations.
Preference for Strong Rupee Will Queer the Pitch
The government and the RBI seem to be one in keeping the rupee strong.
Industry Minister Piyush Goyal made an impassioned plea for a strong rupee at an industry association function on 20 April. The RBI has been selling dollars merrily (forex reserves have come down from $642 billion in February 2022 to just about $600 billion now) to prevent the rupee-dollar exchange rate from depreciating.
A strong rupee, while keeping the unit cost of imported goods low, encourages higher imports, thus raising the overall import bill. A lower export realisation, on the other hand, discourages exports, thus widening the current account deficit. As this policy is likely to continue, India’s trade deficit, which approximated $200 billion in 2021-22 (despite record exports) on account of still higher imports, is likely to deteriorate further in 2022-23.
As exports minus imports is the real addition to the GDP, a higher current account balance will dampen the GDP growth.
2022-23 May Be a Rocky Journey, But Good Policy Can Help
In all, the year 2022-23 seems to be shaping up to be a difficult one for growth and inflation in India.
Higher inflation (more particularly on the consumer side this year), higher negative export-import balance and lower GDP growth (in the range of RBI’s projection) are staring the government, businessmen and people in the face.
A more informed policy framework, however, can make a notable difference.
(Subhash Chandra Garg is Chief Policy Advisor, SUBHANJALI, author of The $10 Trillion Dream: The State of Indian Economy and Policy Reforms Agenda, and former Finance and Economic Affairs Secretary, Government of India. This is an opinion article and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)
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