Posted in economics

Addressing India’s Inflationary Woes

Dr. Debesh Roy, Chairman, InsPIRE


The global economy is hamstrung with rising inflation and slowing growth. Inflation is now well-entrenched across the world, and is definitely not transitory in nature, as thought by US Fed Chair Mr. Jerome Powell and several economists, few months ago. The US consumer inflation surged ahead to touch a more than four decades high of 8.6% annual rate in May 2022, due to spiraling energy and food prices. Similarly, inflation in the UK touched a 40-year high of 9% in April, and is expected to touch 9.1% in May. Further six member states of the EU have inflation rates above 10%, and the average is 8.1%. Most developing countries have been suffering from the wrath of inflation and slowdown in economic growth. Inflation in developed as well as developing economies has been sparked by low interest rates and government stimulus to counter the Covid-19 pandemic’s impact, and disruption in global supply chains, followed by elevated energy and commodity prices due to the Russia-Ukraine crisis.

India has been witnessing rise in retail inflation above the Reserve Bank of India’s (RBI) mandated tolerance level of 6%, from January 2022. Wholesale inflation, however, started rising alarmingly from March 2021, onwards. The RBI and Government of India (GoI) have initiated monetary and fiscal measures, respectively, to curb inflation.

Easing of India’s Retail Inflation

India’s retail [Consumer Price Index (CPI)] inflation eased in May 2022 to 7.04% from an almost eight years high of 7.79% in April (Figure 1). However, it remained above RBI’s upper tolerance level of 6% for the fifth month in a row.  There was a broad-based deceleration in inflation, mainly on account of slower increases in food prices. Core inflation, too, moderated in May to 6.09% from 6.96% in the previous month.

The slowing down of inflation was mainly on account of deceleration in rural CPI inflation, which declined significantly from 8.38% in April 2022 to 7.01% in May (Figure 1), as a result of a decline in the combined weighted contribution of health, education and personal care and effects by 35 basis points (bps), and 40 bps decline in the weighted contribution of food and beverages. Urban inflation, however, declined marginally from 7.09% in April to 7.08% in May (Figure 1). Favourable base effect, too contributed to the decline in inflation. However, there are more upside risks to inflation, with international crude oil prices remaining stubbornly high.

Source: Data accessed from MoSPI, GoI

The consumer food price inflation (CFPI) is the major determinant of retail inflation in India, with a weightage of 39.1% in the CPI. During the six-month period December 2021 to May 2022, CFPI more than doubled from 4.05% in December to 8.31% in April, before dropping to 7.97% in May (Figure 2). This was due to elevated oils and fats inflation at 24.3% in December to 13.3% in May (Figure 3) and a sharp increase in vegetable inflation from -3% in December to 18.3% in May (Figure 5). India imports nearly 60% of its crude edible oil requirement. Around 90% of India’s annual crude sunflower oil requirement of 22-23 lakh tonne is imported from Ukraine to the tune of 70% and 20% from Russia and the remaining 10% from Argentina. The Ukraine-Russia conflict has disrupted supplies of sunflower oil and sharply pushed up its price in the international market, impacting India’s import cost.  

The principal reason for a sharp rise in vegetable prices is the increase in transportation cost due to high fuel price, which in turn is the result of elevated international price of crude oil. High tomato prices, due to fall in production on account of heatwaves prevailing in different parts of the country, also impacted vegetable inflation.

Source: Data accessed from MoSPI, GoI

While cereal inflation increased steadily from 2.6 % in December 2021 to 5,3% in May 2022, pulses inflation declined from 2.4% to -0.4% during the same period (Figure 3). Decline in pulses inflation was on account of record estimated production of pulses in the Kharif and Rabi seasons in the year 2021-22, as well as higher imports of Arhar and Urad.

Source: Data accessed from MoSPI, GoI

Inflation in eggs declined sharply from 4.2% in February to -4.6% in May (Figure 4). Meat and fish inflation rose to 8.2% in May from 7% in the previous month, before falling from 9.6% in March, while milk inflation increased steadily from 3.8% in December 2021 to 5.6% in May 2022 (Figure 4).

Source: Data accessed from MoSPI, GoI

Fruit inflation declined sharply from 5% in April to 2.3% in May, while sugar inflation fell from 5.2% to 4.3% (Figure 5).

Source: Data accessed from MoSPI, GoI

Fuel and light inflation remained elevated during the period at 11% in December 2021, 10.8% in April 2022 and 9.5% in May 2022 (Figure 6), on account of high international crude oil prices, with Brent crude prices remaining around $120 per barrel.

Source: Data accessed from MoSPI, GoI

Surging Wholesale Inflation

India’s wholesale price index (WPI) inflation increased from 15.1 in April to 15.9% in May, the highest level since August 1991, driven by soaring inflation of primary articles (15.5% to 19.7%) and fuel and power inflation (38.7% to 40.6%) (Figure 7). The wholesale inflation of manufactured products, however, eased from 10.9% to 10.1% (Figure 7).

Figure 8 shows that, the gap between wholesale and retail inflation narrowed down from 8.61% in December 2021 to 7.29% in April 2022, before rising to 8.84% in May. This was when retail inflation eased from 7.8% to 7% and wholesale inflation surged from 15.1% to 15.9%.

WPI inflation in the country has been increasing much faster than CPI inflation, since March 2021. Consequently, it is expected that retail inflation would slowly move closer towards wholesale inflation, in the months to come.  Dr. Pronab Sen, former Chief Statistician of India has put it succinctly: “Rising WPI will, by and large, translate into higher retail prices.” High wholesale inflation indicates that input price pressures are still quite high, which will eventually reflect on retail prices.

Source: Data accessed from Office of the Economic Adviser, DPIIT, Ministry of Commerce & Industry, GoI
Source: Data accessed from MoSPI, GoI and Office of the Economic Adviser, DPIIT, Ministry of Commerce & Industry, GoI

Addressing Inflationary Woes

The RBI raised the policy repo rate by 40 bps in May 2022 and 50 bps in June 2022. The central bank is no longer behind the curve and the transmission of the rate in the banking system is also expected to be reasonably quick. While increasing the repo rate could hurt India’s economic recovery, the inability to control inflation will hurt the country’s growth prospects in the medium to long term.

RBI’s inflation projection for FY23 is 6.7%. It is expected that RBI’s Monetary Policy Committee (MPC) could raise the policy repo rate by 60-85 bps by December 2023, i.e., to 5.5-5.75%, depending on the inflation trajectory. A further cause for concern is the depreciation of the rupee, which could worsen inflation. RBI Governor Mr. Shaktikanta Das, in his June 08, 2022 statement on the Monetary Policy has expressed RBI’s approach to control inflation as: “Our approach underscores a commitment to move towards normal monetary conditions in a calibrated manner. We will remain focused on bringing down inflation closer to the target and fostering macroeconomic stability.”

The full impact of the measures announced by the government, viz, excise duty cuts on petrol and diesel, could be seen in the June inflation figure, as the cut in excise duty was announced in the last week of May. With the end of Russia-Ukraine conflict nowhere in sight, inflationary situation could worsen across the world. Although there has been a steady rise in revenue collection so far in FY23, GoI may have to tread the tightrope of balancing excise duty cut for controlling fuel inflation with incurring the budgeted capital expenditure for economic growth.

Posted in economics, MARKET ECONOMY

US Inflation at 8.6% in May 2022 Surges Past Four-decade High Record

Dr Debesh Roy, Chairman, InsPIRE

The U.S. consumer inflation surged ahead to touch a more than four decades high of 8.6% annual rate in May 2022, due to spiraling energy and food prices. There has been no respite from the upward movement of retail inflation in the US since February 2021, which had a benign reading of 1.7% to 5% in April 2021, followed by a steady 5.3-5.4% during July-September, when the Federal Reserve Chair Mr. Jerome Powell was convinced that inflation was transitory in nature. However, October (6.2%) onwards inflation continued to rise unabated touching a 40-year high in March 2022, followed by a slight drop to 8.3% in April, before rising to 8.6% in May 2022 (see figure below). The core-price index increased 6% in May, down from 6.2% in April. March’s 6.5% rise was the highest rate since August 1982.

High inflationary trend is a downside of strong growth in the US, sparked by low interest rates and government stimulus to counter the Covid19 pandemic’s impact, followed by elevated energy and commodity prices due to the Russia-Ukraine crisis. Further, price pressures are strong across much of the US economy partly due to an unusually tight U.S. labor market, with demand for workers outstripping supply.

Source: U.S. Bureau of Labor Statistics

The rise in May inflation was driven partly due to sharp rises in the prices for energy (34.6%) from a year earlier, and groceries (11.9%). The surge in inflation belied hopes among some analysts about the nearing of peak inflation, primarily due to further rise in energy prices, as a result of the prolonged Russia-Ukraine conflict, and a steady rise in services-related costs, mainly those linked to the travel industry.

The US Federal Reserve seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Accordingly, the Federal Open Market Committee (FOMC) had decided to raise the target range for the federal funds rate to 3/4 to 1% at its May 04, 2022 meeting, while anticipating that ongoing increases in the target range will be appropriate. With the May inflation print at more than 40-year high, Ms. Lael Brainard, the vice-chair of the Federal Reserve, has warned that the US central bank may need to extend its run of half-point rate rises into September if inflation does not slow sufficiently in the coming months.

Posted in economics, MARKET ECONOMY

RBI Intensifies its Attack on Spiraling Inflation

Dr Debesh Roy, Chairman, InsPIRE

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on 8th June 2022, unanimously decided to raise the policy repo rate by 50 basis points (bps), the steepest increase in more than nine years, to 4.9 per cent. This is the second hike in the repo rate in just over a month, adding up 90 bps from 4 per cent set in May 2020, with a view to controlling inflation, aggressively. While the RBI was behind the curve to control inflation till the April MPC meeting, it took a decisive step to control spiraling inflation by raising the first repo rate hike in two years by 40 bps in the off-cycle MPC meeting  on 4th May 2022.

The MPC has increased the inflation forecast by 100 bps to 6.7 per cent for fiscal year (FY) 2022-23, and has projected an inflation rate of 7.5 per cent, 7.4 per cent, and 6.2 per cent for Q1, Q2 and Q3 of FY23, respectively. For the first time since the flexible inflation-targeting framework was introduced in October 2016, for policy repo rate setting by the MPC, the RBI, in all likelihood, will fail to achieve its mandate – which is to keep the average inflation at 4 per cent with a +/- 2 per cent tolerance limit – for three consecutive quarters. As per the mandate, RBI would need to explain to Government of India the reasons for inflation exceeding the upper tolerance limit of 6 per cent for three consecutive quarters.

Inflation is now a global phenomenon, due to the Ukraine-Russia war, Covid-related lockdowns in China and global supply chain disruptions. As stated by RBI Governor Mr. Shaktikanta Das, “The war has led to globalisation of inflation. Not surprisingly, central banks are reorienting and recalibrating their monetary policies. Emerging market economies (EMEs) are facing bigger challenges from increased market turbulence, monetary policy shifts in advanced economies (AEs) and their spillovers. The process of economic recovery in EMEs is also getting affected”.

The MPC also decided to drop the accommodative stance to “remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”. As RBI has embarked on an aggressive policy tightening cycle,  the MPC is expected to resort to calibrated tightening and could  decide on two more hikes of 25 bps each in FY23, taking the repo rate to 5.65 per cent by March 2023.

However, there could arise a risk of a wide divergence from RBI’s inflation projections, which could result in a sharper rate hike. Research by SBI shows that RBI could factor in a rate hike in August and even October MPC meetings, and take the repo rate higher than pre-pandemic level by August to 5.25 per cent and in October to 5.5 per cent. The peak rate at the end of the cycle, according to the SBI report now has a lower bound of 5.5 per cent and could go up to 5.75 per cent, depending on inflation trajectory.

Banks have raised their lending rates in response to the rise in the repo rate. This will cause borrowers to pay higher equated monthly instalments for their loans. Further, the demand for loans by retail as well as corporate borrowers would fall, restricting economic activities.

The RBI, however, has kept its growth forecast unchanged at 7.2 per cent for FY23,  with Q1, Q2 and Q3 growth at 16.2 per cent, 6.2 per cent,  4.1 per cent; and 4.0 per cent, respectively, with risks broadly balanced. According to the MPC statement, the recovery in domestic economic activity is gathering strength due to the following factors:

  • Rural consumption should benefit from the likely normal south-west monsoon and the expected improvement in agricultural prospects;
  • A rebound in contact-intensive services is likely to bolster urban consumption, going forward;
  • Investment activity is expected to be supported by improving capacity utilisation, the government’s capex push, and strengthening bank credit;
  • Growth of merchandise and services exports is set to sustain the recent buoyancy.

However, the MPC has warned that spillovers from prolonged geopolitical tensions, elevated commodity prices, continued supply bottlenecks and tightening global financial conditions nevertheless weigh on the growth outlook.

Posted in economics

IMF Downgrades Global Growth Projections

Dr. Debesh Roy, Chairman, InsPIRE

The International Monetary Fund (IMF) in its April 2022 edition of the World Economic Outlook (WEO) has projected the global economy to slow down sharply from 6.1 percent in 2021 to 3.6 percent in 2022 and 2023. The projections are 0.8 and 0.2 percentage points lower for 2022 and 2023, respectively, made in the January 2022 WEO Update.

Beyond 2023, global growth is forecast to decline to about 3.3 percent over the medium term. The sharp cut in growth projections is the result of the humanitarian and economic impact of Russia-Ukraine war, and the sanctions against Russia imposed by the United States (US) and its allies. Crucially, the  projections by IMF assume that the conflict remains confined to Ukraine, further sanctions on Russia exempt the energy sector and the pandemic’s health and economic impacts weaken during 2022. Further, employment and output will remain below pre-pandemic trends through 2026, with few exceptions.

The IMF warns that unusually high uncertainty surrounds the growth forecast, and downside risks to the global outlook dominate—including from a possible worsening of the war, escalation of sanctions on Russia, a sharper-than-anticipated deceleration in China from 8.1 per cent in 2021 to 4.4 per cent in 2022. Moreover, the war in Ukraine has increased the probability of wider social tensions because of higher food and energy prices, which would further weigh on the outlook.

The advanced economies (AEs) are expected to slow-down sharply from 5.2 per cent in 2021 to 3.3 per cent in 2022 and 2.4 per cent in 2023, as shown in the chart below. The US is expected to witness a sharp fall in growth from 5.7 per cent in 2021 to 3.7 in 2022 and 2.3 per cent in 2023. The Euro area, too, is estimated to slowdown from 5.3 per cent in 2021 to 2.8 per cent and 2.3 per cent in 2022 and 2023, respectively.

The growth of emerging market and developing economies (EMDEs) is expected to fall sharply from 6.8 per cent in 2021 to 3.8 per cent in 2022, but would rise to 4.4 per cent in 2023. The projected growth rates for AEs as well as EMDEs have been downgraded from the projections made by the IMF in October 2021 and January 2022, in view of the ongoing Russia-Ukraine war, disruption in global supply chains and unprecedented  world-wide inflationary situation.  

The IMF  downgraded India’s growth forecast for FY23 from 9 per cent estimated in January 2022 to 8.2 per cent, citing the impact of high oil prices on consumer demand and private investments. The forecast for India by the IMF is among the most optimistic so far. While the RBI lowered India’s growth projection for FY23 from 7.8 per cent estimated earlier to 7.2 per cent in the latest Monetary Policy Committee (MPC) meeting (06-08 April 2022), the World Bank reduced India’s growth forecast from 8.7 per cent estimated in January 2022 to 8 per cent, recently. However, India is projected to remain the world’s fastest-growing major economy by the IMF, the World Bank and the OECD. But we live in an uncertain world, and the actual growth could end up below the projections.

The IMF has identified the following five principal forces that would shape the near-term global outlook:

The war in Ukraine

The economic damage will lead to a significant slowdown in global growth in 2022 – a severe double-digit drop in GDP for Ukraine and an 8.5 per cent contraction in Russia, along with spillovers across the world through commodity markets, trade, and financial channels.

Monetary tightening and financial market volatility

Significant rise in inflation in major economies has led to tightening of monetary policy by central banks. This has contributed to a rapid increase in nominal interest rates across advanced economy sovereign borrowers. In the months ahead, policy rates  are generally expected to rise further and central banks would begin to unwind balance sheets in AEs and also in several EMDEs. Capital outflows from EMDEs have led to sharp fluctuations in the financial markets in these economies. Further, the financial markets across the globe have been experiencing sharp fluctuations due to the imminent rise in US Fed rates.

Fiscal withdrawal

Policy space in many countries has been eroded by necessary higher COVID-related spending and lower tax revenue in 2020–21. Faced with rising borrowing costs, governments are increasingly challenged by the imperative to rebuild buffers.

China’s slowdown

Deceleration in China’s economic growth has wider ramifications for Asia and for commodity exporters.

Pandemic and vaccine access

Restrictions have begun to ease as the peak of the Omicron wave passes and global weekly COVID deaths decline. The risk of infection leading to severe illness or death appears lower for the dominant Omicron strain than for others—especially for the vaccinated and boosted. The health and economic impacts of the virus are expected to start to fade in the second quarter of 2022.

Posted in economics

Wholesale inflation surges to 4-month high in March 2022

Dr Debesh Roy, Chairman, InsPIRE

India’s Wholesale Price Index (WPI) inflation surged to a 4-month high of 14.55 per cent in March 2022, which was a sharp rise from 13.11 per cent in the previous month. This was the result of an unfavourable base effect (1.3 per cent in March 2021) and broad-based rally in global commodity prices, especially crude oil, due to the Russia-Ukraine conflict. With this, WPI remained in double digits throughout FY22. The average inflation at 12.94 per cent in FY22 is the highest in three decades.

While wholesale food inflation rate eased sequentially from 8.19 per cent to 8.06 per cent in March 2022, vegetable inflation dropped sharply from 26.93 per cent in the previous month, but remained elevated at 19.88 per cent. Among non-food items, crude oil inflation increased by a whopping 83.56 per cent, leading to a fuel inflation of 34.52 per cent during March 2022. Manufactured price inflation rate rose to 10.71 per cent during the month, from 9.84 per cent in the previous month, as edible oil and basic metals inflation rose to 16.06 per cent and 25.97 per cent, respectively. Core inflation, which excludes volatile food and fuel items, increased from 10 per cent in February 2022 to 10.9 per cent in March 2022.

Although WPI is not the primary index which guides the Reserve Bank of India’s (RBI) monetary policy decisions, it cannot be ignored by the central bank, as rising input costs can feed CPI inflation. This is likely to happen with businesses passing on the rising input costs to retail prices. The gap between WPI and CPI has narrowed from 9.96 percentage points in November 2021 to 7.60 percentage points in March 2022. CPI inflation is on a rising trend since November 2021 and has shot up to a 17-month high of 6.95 per cent in March 2022. What is worrisome is that retail inflation has remained above RBI’s tolerance level of 6 per cent for the third consecutive month.

RBI’s latest industrial outlook survey indicates that manufacturing sector firms expect higher input and output price pressures going forward. Further, on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of US$ 100 per barrel, RBI, in its latest monetary policy (8 April 2022) has projected 5.7 per cent inflation in 2022-23. While the Monetary Policy Committee (MPC) has unanimously decided to maintain the accommodative policy stance, it will focus on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Globally inflation is on the rise, and will continue to remain elevated even after the Russia-Ukraine conflict comes to an end. The uncertainty surrounding the conflict makes it difficult to estimate inflation during the next one-year period. This is true for most countries, including India. Going forward, RBI could raise the policy repo rate by 50 basis points (bps) during FY23.

Posted in economics

India’s Economic Growth: Prospects and Challenges

Dr Debesh Roy, Chairman, InsPIRE

The prospects for India’s real GDP growth for 2021-22 received a setback with the latest official projection (second advance estimate of NSO, MoSPI, GoI on 28 February 2022) dropping to 8.9 per cent (Figure 1) from 9.2 per cent (first advance estimate on 07 January 2022). However, the quantum of real GDP, has been estimated to increase from INR147.54 trillion (USD 1.95 trillion) (FAE) to INR 147.72 trillion (USD 1.95 trillion) (SAE).  The growth of nominal GDP was revised upward from 17.6 per cent to 19.4 per cent, with the quantum of nominal GDP witnessing an uptick from INR 232.15 trillion (USD 3.06 trillion) to INR 236.44 trillion (USD 3.12 trillion) (SAE). The real GDP growth estimate for the previous fiscal year showed an improvement to -6.6 per cent (first revised estimate) from   -7.3 per cent (provisional estimate).  

Note: FRE: First Revised Estimate; SAE: Second Advance Estimate
Source: Based on data accessed from MoSPI, GoI

India’s third quarter (Q3) real GDP fell sharply to 5.4 per cent from 8.5 per cent (Q2) and 20.3 per cent (Q1) (Figure 2). 

Source: Based on data accessed from MoSPI, GoI

Projections of India’s real GDP growth for FY 22 and FY23 are presented in the following table. The lowest estimate for FY 22 is 8.7 per cent by the World Bank and the highest is 9.4 per cent by OECD. The highest projection for FY 23 at 8-8.5 percent has been estimated in the Economic Survey 2021-22 (MoF, GoI) and the lowest is by the World Bank at 6.8 per cent.

Source: (1) MoSPI, GoI, and Economic Survey 2021-22, MoF, GoI; (2) Monetary Policy Statement February 10, 2022, RBI; (3) Ecowrap, February 28, 2022, SBI; (4) World Economic Outlook, January 2022, IMF; (5) Global Economic Prospects, January 2022, World Bank; (6) India Economic Outlook, OECD, December 2021

India’s real GVA is estimated to grow at 8.3 per cent (SAE) in FY22, downgraded from 8.6 per cent (FAE) (Figure 3). The sectors which witnessed high growth are mining and quarrying (12.6 per cent from a low base of -8.6 per cent in FY21), public administration (12.5 per cent from -5.5 per cent), manufacturing (10.5 per cent from -0.6 per cent), and trade, hotels, transport, etc. (11.6 per cent from -20.2 per cent). While the agriculture sector is estimated to grow at a constant rate of 3.3 per cent as in the previous year, financial, real estate and professional sector is estimated to grow at 4.3 per cent (from 2.2 per cent in FY 21) (Figure 3).

Source: Based on data accessed from MoSPI, GoI

India’s growth has traditionally been consumption-led, and the share of private final consumption expenditure (PFCE) in GDP is estimated to decline to 56.6 per cent in FY22 (SAE) from 57.3 per cent in FY21 (Figure 4). The pandemic-induced loss of income and livelihood opportunities in the contact intensive service sector, the informal sector and rural areas, are expected to dampen India’s growth prospects for FY22. However, GoI’s thrust on investment in infrastructure, could lead to high and sustainable growth in income, employment and economic growth. While the estimated increase in the share of gross fixed capital formation (GFCF) from 30.5 per cent in FY21 to 32 per cent in FY22, is a stimulant for growth, the share of government final consumption expenditure (GFCE) which is estimated to decline from 11.3 per cent to 10.9 per cent, could drag down growth. However, the FY 23 Union Budget’s focus on investment in infrastructure with a significantly higher allocation over that of the previous Budget, would crowd in private investment and enable India to grow at around 8 per cent, while continuing to be the fastest growing large economy in the world.  

Source: Based on data accessed from MoSPI, GoI

The economic impact of the third wave of the pandemic has not been as severe as that of the previous waves. The impact of global headwinds like the Russia-Ukraine conflict and the consequent sharp rise in the prices of crude oil and commodity prices, have not been factored in these estimates, and therefore, the final growth print could be 1-2 per cent lower. About 85 per cent of India’s demand for crude oil is met from imports and with the recent sharp rise in Brent crude price to USD 130/ barrel, there would be a sharp rise in the country’s import bill, worsening the country’s current account deficit. This would also lead to a sharper rise in retail inflation, which has already crossed RBI’s upper tolerance limit of 6 per cent. The RBI has continued with its accommodative stance with a view to revving up economic growth. However, with worsening inflationary expectations, the RBI could switch to a neutral stance, and could consider raising the repo rate by 25 bps in the next MPC meeting in April 2022 or in the June 2022 meeting. The developed economies are suffering from the worst phase of inflation in the last 3-4 decades, and the Central Banks in these countries have started tightening liquidity. The US Federal Reserve is expected to raise the Fed rate from the present near zero rate by 25 basis points, in March 2022, and at least two-three more rate hikes during the year.

The Russia-Ukraine conflict has also eroded financial markets globally, including India. Russian strikes at Europe’s largest nuclear plant in Ukraine wiped INR 5 trillion (USD 66 billion) off investor wealth in India on 04 March 2022, with the geopolitical tension eroding about INR 15 trillion ($197 billion) in fortune from 15 February 2022, when Russia announced a partial withdrawal of its troops from Ukrainian border only to launch a full-scale invasion later on.

Geopolitics could erode India’s growth prospects, depending on how long the Russia-Ukraine conflict and the consequent sanctions against Russia would continue. However, if the conflict ends within the next few months, and India gives a big push to investment in infrastructure, the country’s growth prospects could improve, and a 7.8 – 8 per cent growth in FY23 could be achievable.

Posted in economics

Indian Economy Poised to Grow at 9.2% in FY22

Dr Debesh Roy, Chairman, InsPIRE

The Indian economy is poised to grow at 9.2% in FY22 (Figure 1) as per the First Advance Estimate of the country’s Gross Domestic Product (GDP) (at 2011-12 prices) estimated by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI), Government of India. This is against a pandemic-induced contraction of 7.3% suffered by the economy in FY21. The real GDP is estimated to increase by 1.3% over that of the pre-pandemic year (FY20).

It is pertinent to note is that, notwithstanding a favourable base effect, the economy is set to record a higher GDP compared to the pre-pandemic year FY20, due to favourable policy environment, resulting in a positive investment growth, as reflected in the Gross Fixed Capital Formation (GFCF).

The nominal GDP is set to grow at a robust 17.6% in FY 22, compared to -3.0% in FY 21. The FY22 nominal GDP, estimated at INR 232.15 trillion (USD 3.12 trillion) is expected to be 14.1% higher than that of the pre-pandemic year (FY20) at INR 203.51 trillion (USD 2.74 trillion).   The economy which was on a decelerating mode during the three pre-pandemic years, (real GDP growth at 6.8%, 6.5% and 4.0% respectively during FY18, FY19 and FY20 and nominal GDP growth at 11.0%, 10.5% and 7.8%, respectively), is set to achieve a robust growth 9.2% (real GDP) and 17.6% (nominal GDP) in FY22 (Figure 1).

Source: MoSPI, GoI

The real Gross Value Added (GVA) in FY22 is estimated to grow at 8.6% (Table 1). The GVA data reveals that all sectors of the economy except ‘trade, hotels, transport, communication and services related to broadcasting’ (which are still 8% below the pre-pandemic level) reached the pre-pandemic level (on constant prices).

The agriculture sector, which was the only sector unaffected by the pandemic in terms of real GVA growth in FY21, is estimated to grow steadily at 3.9%, compared to 3.6% in the previous year and 4.3% in FY20. The industrial sector is expected to achieve a robust recovery, with manufacturing; mining and quarrying; electricity, gas and water supply; and construction, set to grow at 12.5%, 14.3%, 8.5% and 10.7%, respectively (Table 1).  Under the services sector, trade, hotels, transport, communication and services related to broadcasting, which was the hardest hit during the pandemic is estimated to grow at a robust 11.9%. However, financial, real estate, and professional services, etc. is estimated to grow at a less impressive 4.0%. Public administration, defence, etc. is estimated to grow at 8.6% (Table 1).

Source: MoSPI, GoI

On the expenditure side, Private Final Consumption Expenditure (PFCE) is still 3% below the pre-pandemic level, and its share in GDP is observed to be on a declining trend from 57.1% in FY20, to 56% in FY 21 and further down to 54.8% in FY22 (Figure 2). This is a cause for concern as India’s growth story has essentially been a consumption led one. Loss of lives, livelihoods, jobs and income caused by the pandemic have depressed private consumption.

Another concern is the decline in the share of Government Final Consumption Expenditure (GFCE) in GDP, from 11.7% (FY21) to 11.6% (FY22) (Figure 2). A steady and sustainable growth in GDP can be sustained with a higher share of GFCE, as it crowds in private investment.  While fiscal consolidation is of prime importance for attaining high, steady and sustainable growth, it is imperative to recalibrate the same to address the serious impact of the pandemic on the economy.

According to research by SBI (Ecowrap, 07 Jan, 2022), “taking into account the revised GDP figures of today, even if we consider the additional spending announced by the Government in early December 2021 fiscal deficit of the Government still comes at INR 15.88 trillion (USD 0.21 trillion) or 6.8% of the GDP. For FY23, the fiscal consolidation should remain limited to 30-40 bps from the current fiscal”.

A silver lining in the expenditure side is the increase in the share of Gross Fixed Capital Formation (GFCF) in GDP to 32.9% in FY22 (Figure 2), the highest level in the last five years. The primary driver for higher GFCF is the investments made to meet the growing pent-up demand in the economy. The focus of GoI on investment in infrastructure and the Performance Linked Incentive (PLI) Scheme, should lead to accelerated growth in investments, leading to a higher and more sustainable growth in GDP.  

Source: MoSPI, GoI

According to the NSO, the First Advance Estimates (FAE) of GDP, introduced in 2016-17 to serve as essential inputs to the Budget exercise, is based on limited data and compiled using the Benchmark-Indicator method i.e., the estimates available for the previous year (2020-21 in this case) are extrapolated using relevant indicators reflecting the performance of sectors.

While there could be some amount of under- or over-estimation of GDP in the FAE, the subsequent estimations, could be within 20-30 basis points, on either side. There could possibly be an upward bias in the revised estimates for FY22. However, it again depends on the impact of the prevailing omicron variant OF Covid-19 on contact-intensive sectors of the economy. Nevertheless, SBI has stuck to its estimate of 9.5% growth in FY22. Earlier estimates by RBI and IMF also point to a 9.5% growth for the Indian economy, while OECD’s estimate is a tad lower at 9.4%, which would still be higher than the growth estimates for China at 8% (IMF) and 8.1% (OECD), making India the fastest growing large economy in the world.

Posted in economics

Status of Inflation in India – September 2021

Dr Debesh Roy, Chairman, InsPIRE

Retail Inflation

India’s Consumer Price Index (CPI) inflation fell sharply from 5.3% in August 2021 to  4.35% in September 2021, coming closer to RBI’s medium-term inflation target of 4%, and continuing its declining trend for the fourth consecutive month (Figure 1). A sharp decline in food inflation was primarily responsible for the decline in general inflation. While rural inflation dropped to 4.13% in September from 5.28% in the previous month, urban inflation declined from 5.32% to 4.57%. The retail inflation trend for the first half of FY22 reveals a sharp rise from 4.23% in April to 6.3% in May, before tapering to 6.26% and 5.59% in June and July, respectively.

The RBI in its latest Monetary Policy on 8 October 2021 had sharply reduced the outlook for CPI inflation during FY22 from 5.7% projected in the previous MPC meeting (04-06 August 2021) to 5.3%. However, the IMF in its October 2021 issue of World Economic Outlook raised its inflation projection for India from 4.9% estimated in April to 5.6%, citing growing worldwide inflationary risks.  

Source: MOSPI, GoI

The main cause for the decline in retail inflation in September is the sharp easing of food inflation (Figure 2). The Consumer Food Price Inflation (CFPI) declined steadily from 5.15% in June 2021 to 3.96% in July and 3.11% in August, before it fell sharply to 0.68% in September. Sharp decline in inflation was observed in respect of vegetables (-11.68% to -22.47%) and eggs (16.33% to 7.06%). Inflation for cereals continued to be  negative at -0.61%. However, inflation for edible oils (34.19%) and non-alcoholic beverages (12.99%), remained elevated.

Fuel inflation increased from 12.95% to 13.63%, due to continuous rise in international crude oil prices. Core inflation, which excludes food and fuel prices, however, rose from 5.5% in August to 5.8% in September.

Source: MOSPI, GoI

Further easing of food inflation in the coming months due to good kharif harvest, and favourable base effect, will keep inflation benign. This would give enough leeway to the RBI to continue with the accommodative stance, at least till April 2022 monetary policy review. However, inflation risks remain high due to elevated international commodity prices, including crude oil prices. Further, price pressures could intensify due to the second-round effects of high fuel costs, resulting in higher prices of other goods, after a time lag.

Wholesale Inflation

India’s WPI inflation declined to 10.66% in September, the lowest in six months,   from 11.39% in August (Figure 3). However, the continued high WPI inflation was on account of high inflation of manufactured products (weight of 64.2%) in May, June, July, August and September at 11.25% 10.96%, 11.2%, 11.39% and 11.41%, respectively.

It is evident that cost push pressures are gradually seeping into prices of manufactured goods, due to increase in manufacturing activities in the post-pandemic situation. The highest inflation was observed in case of crude petroleum and natural gas at 59.5%, 46.97%, 40.28%, 40.03% and 43.92%, respectively, during the last five months, due to steady increase in the international price of crude oil.

Fuel and power inflation at 36.74%, 29.32%, 26.02%, 26.09% and 24.81 respectively   in May, June, July, August and September. The decline in WPI inflation was due to reduction in food inflation from -1.29% in August to -4.69% in September, 2021.

Price volatility in the international markets for crude oil and rising prices of edible oils and metal products would lead to further rise in WPI inflation, considering the fact that India is a price taker for most of these commodities.

Source: Office of the Economic Adviser, Ministry of Commerce and Industry, GoI

There continues to be a divergence between CPI and WPI inflation (Figure 4) because of the nature of the price indices and higher weighting of food items in CPI (47.25% against 15.26% for WPI) and that of manufactured items in WPI (64.23%).

Source: MOSPI, GoI and Office of the Economic Adviser, Ministry of Commerce and Industry, GoI
Posted in economics

Strong Global Recovery on the Cards: India Set to Regain its Numero Uno Position

Bijetri Roy, Managing Director & Chief Strategy Officer, InsPIRE

The OECD, in its interim report for September 2021, has projected a strong, but uneven global growth in the years 2021 and 2022 (Charts 1 and 2). Government and central bank support and progress in vaccination would lead to growth above the pre-pandemic level. With countries emerging from the crisis facing different challenges, the growth would remain uneven.

Wide differences in vaccination rates between countries and emergence of new variants of the virus have restricted the opening up of economies and affected the supply chains. Output and employment gaps continue in many countries, especially in emerging-market and developing economies (EMDEs), where vaccination rates are low.

Estimates by OECD indicate that global GDP would grow at  5.7% in 2021 (Chart 1), followed by 4.5% in 2022 (Chart 2). The GDP has now surpassed its pre-pandemic level, but output in mid-2021 was still 3.5% below the projection made before the pandemic. This indicates  a real income shortfall of over $ 4.5 trillion (in 2015 PPPs). It is, therefore, imperative to close this gap to minimise long-term damage to the global economy from the pandemic through job and income losses.

G20 countries are expected to grow at 6.1% in 2021 (Chart 1) and 4.1% in 2022 (Chart 2), mainly driven by high growth in India (9.7%), China (8.5%), Turkey (8.4%), and Argentina (7.6%) in 2021. The year 2022 could witness a slower, although a stable growth due to pick up in investments and consumption, without the benefit of base effect. Growth in GDP in 2022 is expected to be influenced by India (7.9%), Spain (6.6%) and China (5.8%).

As indicated by high-frequency activity indicators, such as the Google location-based measures of retail and recreation mobility, global activity continued to strengthen in recent months, helped by improvements in Europe and a strong rebound in India and Latin American countries.  

India is set to regain its position as the fastest growing economy in the world.  According to OECD, India is expected to grow at a real GDP of 9.7% in 2021-22 (Chart 1), albeit from a low base. However, the Indian economy is expected to get on track to a long-term high growth trajectory, with a brisk growth of 7.9% in 2022-23 (Chart 2).

The Q1 (April-June 2021) GDP figures, the latest core sector growth data and recent positive high frequency activity data, indicate that the economy is gaining traction. Standard & Poor’s has also highlighted in a recent Asia Pacific report that India’s growth in GDP would  make a strong rebound in the July-September 2021 quarter, but warned against the impact of faster than expected tapering by the US Federal Reserve, causing capital flow risks as monetary policy by Reserve Bank of India (RBI) remains accommodative with real rate of interest in negative territory.

However, tapering by US Federal Reserve is expected to be gradual and EMDEs like India may not face an adverse situation similar to the taper tantrum of 2013. Moreover, India’s economic fundamentals are getting stronger, and the country could grow at a faster and more sustainable rate.

The Chinese economy is showing signs of a slowdown in economic growth. Troubles are brewing in the real estate and energy sectors in China. The country is facing an energy crunch due to shortages of coal for power generation, forcing it to increase purchase of natural gas. China’s power demand increased by 15% during the current year, but its domestic supply of coal – the largest source of power generation in the country – grew by just 5%. The Evergrande crisis has shown the fragility of the real estate sector in the country. If that is not all, the Chinese government’s recent crackdown on large corporations could impact investment and growth adversely.

*India’s data is for the  fiscal year 2021-22 
Source: OECD Economic Outlook, Interim Report September 2021
*India’s data is for the fiscal year 2022-23 
Source: OECD Economic Outlook, Interim Report September 2021.

The global economy continues to be in a state of flux. There is ample evidence to suggest that the supply shock reverberating around the world, combined with outbreaks of the Delta variant of corona virus, is tempering the recovery in growth. Results of business surveys from the US, UK and Eurozone suggest that economic activities have slowed down as delivery times grew longer and backlogs built up.

Policy Measures to Support Global Growth Prescribed by OECD

Governments need to ensure deployment of all resources necessary to accelerate vaccinations throughout the world to save lives, preserve incomes and control the virus. Also, there is need for stronger international efforts to support vaccinations in low-income countries.

Continuance of macroeconomic policy support, with the mix of policies contingent on economic developments in each country.

Maintenance of accommodative monetary policy, with a clear guidance about the horizon and extent to which any inflation overshooting will be tolerated.  Also, there needs to be a clear  roadmap towards normalisation of monetary policy.

Fiscal policies should remain flexible and contingent on the state of the economy.

Credible fiscal frameworks that provide clear guidance about the medium-term path towards debt sustainability, and likely policy changes along that path, to help maintain confidence and enhance the transparency of budgetary choices.

There is a need for stronger public investment and enhanced structural reforms for boosting resilience, and improving the prospects for sustainable and equitable growth.

Posted in economics

Brisk Core Sector Output Growth in August 2021

Dr Debesh Roy, Chairman, InsPIRE

India’s eight core industries witnessed a brisk 11.6% growth in output in August 2021, compared with 9.9% in the previous month, and 9.3% in June 2021 (Chart 1), in spite of a less beneficial base effect. The sector also witnessed a 3.9% increase from the pre-Covid level of August 2019. However, the overall output was still lower by 0.3 per cent when compared to the February 2020 level.

During the period August 2020 to February 2021, the growth remained negative or very low, ranging between (-) 6.9% (August 2020) and 1.3% (January 2021), due to fall in consumption and investment demand on account of the impact of country-wide lockdown and slow opening up of the economic sectors. The growth rose sharply to 12.6% in March 2021 and  62.6% in April 2021, mainly due to low base effect.  The growth moderated to 16.4% in May 2021 (Chart 1).

Source of data: Press Release dated September 30, 2021, Office of the Economic Adviser, Department of Promotion of Industry & Internal Trade, GoI

The core sector growth in August 2021 was mainly driven by cement at 36.3% (compared to 21.7% in July and 7.5% in June 2021), natural gas at 20.6% (compared to 19% in July and 20.6% in June 2021), coal at 20.6% (compared to 18.8% in July and 7.4% in June 2021), electricity at 15.3% (compared to 11% in July and 8,2% in Junto e 2021), and refinery products at 9.1% (compared to 6.7% in July and 2.4% in June 2021) (Chart 2).  The steel sector, however,  witnessed a steady slide in growth from 24.9% in June 2021 to 9.4% in July 2021 and 5.1% in June 2021. But, fertilizers (-3.1%) and crude oil sectors (-2.3%) suffered decline in August 2021.

The high core sector output growth in August 2021 possibly reflects the beginning of a period of a more elevated and sustainable growth trajectory of the core industries, due to higher growth in the economic sectors and the thrust of the government on investment in infrastructure as per the National Infrastructure Pipeline. Weak monsoon rains in August positively impacted the output for coal, cement and electricity. Also, it influenced the increase in  mobility that resulted in the growth in petroleum refinery products. However, excess rainfall during September could have an adverse impact on the growth of output in these sectors. Therefore, according to ICRA, core sector output in September may not be sustained, and  could fall sharply to 4-6%.

Source of data: Press Release dated September 30, 2021, Office of the Economic Adviser, Department of Promotion of Industry & Internal Trade, GoI