India at low risk of stagflation owing to prudent policies: Finance Ministry

“Many countries around the world, including and especially developed countries, face similar challenges. 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,” the ministry said.

The challenges need to be managed carefully without sacrificing the hard-earned macroeconomic stability, the finance ministry added.

While the fiscal deficit for FY22 stood at 6.7 percent of the gross domestic product, slightly lower than the revised target of 6.9 percent, economists believe the fiscal deficit for FY23 is likely to cross the target of 6.4 percent by as much as 50 basis points.

A jump in the fiscal deficit may lead to the widening of the current account deficit, multiplying the effect of expensive imports, and weaken the value of the rupee thereby, further aggravating external imbalances, creating the risk (admittedly low at this time) of a cycle of wider deficits and a weaker currency, it said.

“Rationalising non-capex expenditure has thus become critical,not only for protecting growth supportive capex but also for avoiding fiscal slippages. Depreciation risk to rupee, however, still remains as long as net Foreign Portfolio Investor (FPI) outflows continue in response to the increase in policy rates and quantitative tightening in advanced economies as they wage a prolonged battle to calm inflation,” it said.

The imported components of high retail inflation in India have mainly been elevated because of the global prices of crude and edible oil, it said.

The onset of the summer heat wave has also contributed to the rise in food prices domestically, it added.

However, going forward international crude prices may be tempered as global growth weakens and the Organisation of Petroleum Exporting Countries (OPEC) increases supply, it said.

In connection with the RBI’s monetary policy, the May 2022 report said it is now fully dedicated to reining inflation pressures in the economy.

It is hiking repo rates and sucking out excess liquidity from the banking system after inflation has remained persistently above 6 percent for four consecutive months.

Around the same time, it said the government also played a role in the heavy lifting for inflation control by implementing duty cuts and targeting subsidies to protect the needy against the price rise.

In May, the government reduced excise duty by Rs 8 per litre and Rs 6 a litre on petrol and diesel, respectively, to control price rise. Also, the government provided Rs 200 per cylinder subsidy to Ujjwala Yojana beneficiaries for 12 cylinders in a year.

The impact of these measures and subsequent ones, if any, on growth and inflation will manifest in the data in the coming months, the report noted.

However, the momentum of economic activities sustained in the first two months of the current financial year augurs well for India to continue to be the quickest growing economy among major countries in 2022-23.

The report also noted that the world is staring at a distinct possibility of widespread stagflation, but India is at low risk of stagflation, owing to its prudent stabilisation policies.

Underscoring that the Indian economy in 2021-22 has indeed fully recovered the pre-pandemic real GDP level of 2019-20, it said the real GDP growth in 2021-22 stands at 8.7 percent, 1.5 percent more than the real GDP of 2019-20.

India’s GDP in nominal terms is now Rs 236.65 lakh crore or USD 3.2 trillion in 2021-22 compared to the pre-pandemic nominal GDP of USD 2.8 trillion in 2019-20.