Indian economy faces low stagflationary risks compared to the rest of the world, the finance ministry’s chief economic adviser (CEA) V Anantha Nageswaran said on May 31 after data showed that economic growth in January-March was the slowest in a year.
There is considerable momentum in economic activity in India and while the inflation rate is high “compared with the experience of many developed and developing countries, India is somewhat better placed,” Nageswaran told reporters.
Moreover, both the central bank and the government are seized of the problems and are addressing them, the CEA added.
Asia’s third-largest economy is estimated to have grown 8.7 percent in FY22 after growth slid to 4.1 percent in the January-March quarter, data released on May 31 showed. Growth likely slowed in the first quarter of the calendar year 2022 because of the hit to activity from the Omicron variant-led third COVID-19 wave and the Russia-Ukraine war.
Meanwhile, retail inflation in India had spiked to an eight-year high in April and has stayed above the 4 percent target for 31 months. The Ukraine war has surged commodity prices. India is hit because it imports key raw materials and depends on inbound shipments for 85 percent of its crude oil needs.
In recent weeks, both the Reserve Bank of India and New Delhi have moved to curb the spike in the cost of living. The RBI has raised interest rates and withdrawn liquidity from the banking system while the government has cut taxes on fuel and made other duty tweaks to lower input costs.
The recent steps by the government and central bank will help keep inflation increases under control, adviser Nageswaran said.
The Indian central bank’s confidence to raise rates is a sign that the economic recovery is growing roots and taking hold, the official added.
“In general, sometimes interest rates becoming normal need not necessarily be an anti-growth move because you are coming from an extremely low real rate of interest to a low rate of interest. So only when real rates become highly positive, they become restrictive on growth," the CEA said.
Managing the troika of growth, inflation and the fiscal balance is currently a challenge for all economies, the official added.The situation was fluid and it is too early to speculate on further moves by the government, the CEA said, adding that imported inflation contributes around 2 percentage points to overall inflation.