July , 2022
India is facing near-term economic challenges- Finance Ministry
21:03 pm

Kishore Kumar Biswas

The recent monthly economic report of the Indian finance department has indicated that India is facing near-term challenges in maintaining its fiscal deficit, sustaining economic growth, controlling inflation and containing the current account deficit. The report also points out, “Many countries around the world, especially developing countries, face similar challenges. India is relatively better placed to weather these challenges because of its financial sector stability and its vaccination success in enabling the economy to open up.” A similar view was expressed recently by Sanjib Sanyal, member, Economic Advisory Council of Prime Minister, in an interactive session at the Bharat Chamber of Commerce in Kolkata.

The recent provisional estimate of growth of Indian economy of FY 2021-22

According to the Central Statistical Office, the Indian economy grew by 8.7% in FY 21-22 compared to that of a negative growth of 6.6% in the previous FY 20-21. So, India has crossed the pre-pandemic level of its GDP. The 8.7% growth is considered as a respectable achievement of the Indian economy. This is because very few large economies have been able to achieve this rate of growth of GDP in FY 21-22 – in the backdrop of the Covid-19 pandemic. At the same time, it is known that the Indian economy has been facing several new challenges. This is reflected even in the last quarters of FY 21-22. In the fourth quarter, India grew only by 4.1% compared to that of the same quarter of FY 20-21.

In this matter, a notable aspect has been raised by Professor Arun Kumar, macroeconomist and public finance theorist. He points out that growth of GDP was measured on the basis of data from the organised sector. During the pandemic situation, the non-agricultural unorganised sector, responsible for producing 40% of the economy, had been suffering due to two reasons. At least 5% of the units had been closed in that period and at least 5% of its production share had gone to the organised sector. So according to his estimates, the non-agricultural unorganised sector had suffered a contraction of 3.9% of GDP (approximately 10% of 40%) which is not considered in the GDP estimate. So the actual recovery of GDP is yet to be positive.

The present economic perspective and government initiatives

Price inflation has been a very broad-based and pervasive problem around the world. One of the major reasons of high inflation has been rising input costs – the most prominent one being the rising prices of petroleum oil. The price of oil has reached $ 120 per barrel as of June 19, 2022. Secondly, the rising prices of metals is also responsible for the rising cost of production. But the most important factor of rising inflation has been the rising prices of food items. There have been a lot of surveys regarding why the Indian economy has been prone to price inflation. Most of the surveys observed that rising food prices has been the most important element. Even in the measurement of retail inflation, food and beverage items are weighed as high as 40%. The media, as well as many observers, are vocal about rising prices of petro items. But its weight (proportion of the total expenditure) in inflation measurement has been only 7%. That means even if the prices of petrol and diesel rise by 100% (assuming the constant elasticity of demand and constant other expenditure), the retail inflation should increase by only about 14%. But in the case of food and beverages, it would be 80%.

Global perspective

In the global scenario, the negative growth of GDP of the US economy in the last quarters and historically high rate of inflation have raised anxiety. Many observers believe that the US may enter into a recessionary phase. This may have a far-reaching impact in the global economies - including the Indian economy. The US central bank has raised the repo rate by 75 basis points and there has been an indication that it would gradually increase the rate to 3% or so. That will have a huge impact in the financial market of India and many other countries of the world.

Consequences of rising interest rate

In India, rising interest rate means rising cost of borrowing and hence higher input cost. Secondly, investors may postpone new investment if any uncertainty in selling products arises. Thirdly, the prices of sovereign bonds as well as private corporate bonds may go up. So, the cost of finance will rise. The government will have to lower its expenditure. This may lower GDP and slow down employment.

A relevant theoretical issue

The RBI has taken up a stringent monetary policy. But many economists are not satisfied as monetary policy could be beneficial if the nature of inflation would be demand pull, that is, mainly due to rising demand and income of the consumers. But here, the nature of inflation has been cost push and there is a lot of capacity to increase production. In this situation, monetary policy, that is extracting a considerable portion of money from circulation, may not be workable. The government has to take fiscal measures like action to control the prices of food, fuel, health and education expenditure, etc. and make these freely available. This would be the actual policy prescription of a section of economists. Only monetary policy cannot serve the purpose.


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