Indian Government Hopes To Rein In Inflation With RBI's Help: April Economic Review
The review anticipates risk of sustained high inflation would remain low as it believes aggregate demand is still in recovery.
The government hopes to weather global inflation on the back of central bank's efforts even as it remains optimistic about a sustained economic momentum.
And if the global inflation doesn’t temper following monetary tightening by central banks, then “it points at the persistence of supply-demand imbalances that only coordinated actions of world leaders can resolve”, the Finance Ministry said in its April Economic Review released on Thursday.
The review comes amid rate hikes, the ongoing geopolitical conflict, economic sanctions against Russia, Covid-19 lockdowns in China, and supply-chain disruptions.
Reining In Inflation
The Reserve Bank of India's monetary policy committee recently increased the repo rate by 40 basis points, accompanied by an increase in the cash reserve ratio for banks. The U.S. Federal Reserve hiked the benchmark rate by half a percentage point in the beginning of May.
Amid this monetary tightening, the IMF's World Economic Outlook estimates global growth would decline from 6.1% in 2021 to 3.6% in 2022.
Though the IMF expects India to be one of the fastest growing economies, the Finance Ministry's review notes that inflation is expected to be elevated in 2022-23, subject to mitigating efforts of the government and the RBI.
Retail inflation as measured by the Consumer Price Index–Combined (CPI-C) rose to 6.95% in March. But the review said the risk of sustained high inflation would remain low as the government believes aggregate demand is still in recovery.
“Evidence on consumption patterns further suggests that inflation in India has a lesser impact on low-income strata than on high-income groups,” the review said.
The RBI has projected CPI inflation for FY23 at 5.7%.
Economic Activity Remains Positive
The country’s economic momentum has remained positive with record GST collections and more e-way bills generated in April.
GST collection touched Rs 1.68 lakh crore in April (collected for March). Power demand rose 11.5% year-on-year during the month due to early onset of summer and a spurt in commercial activity. With the country facing a heat wave and temperatures touching 48 degrees Celsius, power demand is expected to remain high in the following months.
In contrast, global activity grew at a slower pace in April as indicated by the PMI Composite Index, which stood at 51.0 compared with 52.7 in March 2022 due to slower growth in output and new orders, affecting exports.
According to the review, the agricultural sector has shown signs of a good harvest season with an increase in acreage of summer crops. The government expects rural income to further increase with the rabi season and agricultural exports as geopolitical tensions continue.
Agricultural exports rose 19.9% year-on-year in April, the review said.
Industrial output improved with the manufacturing PMI rising to 54.7 in April from 54 in March.
Overseas demand for India’s merchandise exports continued to be high, and service exports have also been robust, reaching an annual all-time high of $254 billion in 2021-22, the review said.
“Gross foreign direct investments nudged $77 billion in April–February FY2021-22, against the full-year inflow of $82 billion in 2020-21,” the report said.