The Indian economy faces low risk of stagflation, thanks to prudent stabilisation policies, the finance ministry said in its monthly economic report on June 20.
The Reserve Bank of India’s monetary policy is now fully dedicated to reining in the inflationary pressures in the economy and it has also shared the heavy lifting for inflation control through duty cuts and targeting subsidies, the finance ministry said.
“The impact of these measures and subsequent ones, if any, on growth and inflation will manifest in the data in the coming months. However, the momentum of economic activities sustained in the first two months of the current financial year augurs well for India continuing to be the quickest growing economy among major countries in 2022-23,” said the report.
India’s retail inflation stayed above the central bank’s medium-term target of 4 percent for 32 months in a row and shot past the 6 percent tolerance ceiling, five months on. Given the central bank's latest forecast, the Monetary Policy Committee is on course to fall short of its mandate in October, when inflation data for September will be released.
Stagflation refers to a period of low growth and high inflation.
Battered by the pandemic, the Indian economy is recovering but its size is barely above the pre-pandemic level. Also, growth could be threatened by elevated inflation as well as global economic turmoil. The county imports 85 percent of its crude oil needs.
Going forward, global crude prices may be tempered as global growth weakens and the Organisation of Petroleum Exporting Countries (OPEC) increases supply, the finance ministry said.
The timing of this remains uncertain and there are also upside risks to oil prices as OPEC supply will not be enough to match the shortfall caused by potential withdrawal of Russian crude from the market, it said.
With the arrival of southwest monsoon showers, food prices and consequently the headline retail inflation are expected to decline.
“Early evidence of that was seen in May with retail inflation easing from 7.79 percent in April to 7.04 percent in May and food inflation dropping from 8.31 percent to 7.97 percent,” the finance ministry said.
Central banks in both developed and developing economic are quickly tightening monetary policies as they roll back pandemic-era stimuli. While the impact of the tightening may take some time to play out, inflation is spiking to record highs amid high energy and food costs, raising fears stagflation.
In the UK, a recession looms this year, while US Treasury Secretary Janet Yellen has said a recession is not at all imminent, but admitted that inflation was "unacceptably high".