Chief economic advisor raises red flags over oil and US Fed, urges crossing river one stone at a time

Dr V Anantha Nageswaran, Chief Economic Advisor

High crude oil prices in international markets owing to the Russia-Ukraine war and the US Federal Reserve's aggressive stance on tightening policy are the two major obstacles facing the Indian economy, Chief Economic Advisor V Anantha Nageswaran told CNBC-TV18 on April 12.

The CEA pointed out these two red flags while talking to the news channel at the National Leadership Conclave organised by the All India Management Association (AIMA).

Talking about the commodity price shock, the CEA said high prices globally make the outlook quite uncertain, and hinted at extreme uncertainty over evolving geopolitical tensions.

Excerpts from an interview:

How bigger risk is the commodity price inflation as far as sectors like construction, real estate, etc. are concerned because steel, cement, and paint prices and just about everything is surging at this point apart from oil? How much of an impact will it have? Could it derail the recovery that we are seeing in some of these sectors?

Impact is what you have seen in RBI revising the growth forecast.

If it were to sustain, could this be one of the biggest challenges we are going to have to deal with. Could there be any way for the government to offset this?

We need to keep one eye on the fiscal balance. Let's say if we end up mitigating every problem through a fiscal solution, then the budget deficit will blow out of proportion which will have an impact on bond yields. It will further compound the problem that we are trying to solve. It is difficult to give a precise response at this point in time. As the Economic Survey pointed out, in these extremely uncertain times, we just have to cross the river by feeling one stone at a time.

Also Read: If oil remains above $110 a barrel, burden will be shared by govt, OMCs and consumers: CEA

You talked about green shoots that are visible across different sectors at this point. What is the red flag that you are most concerned about?

The red flag is the persistence in hydrocarbon fuel prices and the potential impact of the Federal Reserve aggressively tightening policy to the extent that the market is pricing in today. That will have an impact on global capital flows. And, as the country with a current account deficit, we will naturally be impacted. To me, oil price and Federal Reserve policy are the two red flags to watch out for.

There is a downward revision recently in the monetary policy review by the RBI over the GDP growth forecast. The RBI has lowered the growth forecast from 7.8 to 7.2% for FY23.

After the monetary policy committee meeting on April 8, the RBI said the consumer price index (CPI) inflation is expected to average 5.7 percent in FY23.

Oil prices have been on an unabated uptrend for more than a month now. Brent crude prices are close to $100 per barrel now. The surge in crude prices, since the eruption of Russia-Ukraine war, has also stoked inflation globally. This has prompted major central banks across the world to revise their key policy rates. However, the monetary policy committee has kept the key lending rate unchanged at four percent.