Economic Survey 2022: Measures to cool global inflation to affect capital flows, pressure exchange rate

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The impact of surging inflation, particularly in the US where it has risen to its highest since 1982, is hard to miss as one reads through the Economic Survey 2021-22.

The annual economic report card authored by principal economic adviser Sanjeev Sanyal and his team of advisers has warned that India will need to be wary of imported inflation, especially from elevated global energy prices.

The likely withdrawal of liquidity by major central banks over the next year may also make global capital flows more volatile, the authors wrote.

“Inflation has reappeared as a global issue in both advanced and emerging economies. The surge in energy prices, non-food commodities, input prices, disruption of global supply chains, and rising freight costs stoked global inflation during the year,” the survey said.

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The survey, however, refrained from providing an estimate of where the consumer price index or the wholesale price index could settle even as it has forecast GDP growth at 9.2 percent in real terms in the current fiscal and 8-8.5 percent in the next.

The survey, which was tabled in the Lok Sabha on the eve of the Budget, has assumed that oil prices will average $70-75 a barrel in the new fiscal year.

The widely followed consumer price index (CPI) moderated as food prices cooled but the wholesale price index, which represents the prices that producers face, continues to be in double-digits.

The survey said the CPI inflation moderated to 5.2 percent in 2021-22 (April-December) from 6.6 percent in the corresponding period of 2020-21.

Also Read: Economic Survey 2022 pegs FY23 GDP growth at 8-8.5 percent

For the moment, the CPI index stays within the tolerance band of the Reserve Bank of India. The CPI index for December 2021 provisionally printed a 5.6 percent rise from a year ago.

“Although the high WPI inflation is partly due to base effects that will even out, India does need to be wary of imported inflation, especially from elevated global energy prices,” the survey said, taking note of the cut in the excise duties on petrol and diesel by the Centre and value-added tax by states.

Also read: Economic Survey 2022: Resilience of India's exports to drive growth revival in 2022-23

Growth warning

This rise in inflation was bound to lead to an unwinding of pandemic-led stimulus, which would affect capital flows, put pressure on the exchange rate and slow down growth in emerging economies, it cautioned.

“The revival in inflation across the world now poses risks from both a tighter global liquidity condition and exchange rate volatility in global currency,” it said.

The impending scaling back of the stimulus had reignited fears of taper tantrums but India may not have to worry too much on this count, the survey said.

“India’s external sector—well supported by strong exports, capital inflows, low CAD and external financing requirements and high foreign exchange reserves, with various external vulnerability indicators well within manageable limits—is far better prepared this time to face any external shocks arising out of tightening of the monetary policy stance by the advanced economies in coming months,” the authors said.