Indian Economy : The Current Picture
In the recent times, Indian economy has witnessed multiple shocks some of them being black swan events like the COVID-19 pandemic and the Russia-Ukraine war. During the post policy press conference, RBI Governor Mr. Shaktikanta Das addressed the concerns regarding the current situation of the economy and claimed that even after these multiple shocks the Indian Economy has shown signs of growth and stability. Furthermore, he mentioned that the current account deficit is manageable. He also touched upon the issue of current high inflation.
The Reserve Bank of India claims that the Indian economy is resilient to the ongoing global recession due to a pick-up in the manufacturing and service sector, fulfilling monsoons, stabilisation of inflationary pressures and adequate international reserves to fall back upon.
In this article, we will analyse this statement from various angles.
What are the multiple shocks that the economy has witnessed?
There are many reasons of current economic recessions some of them being:
- COVID-19 Pandemic: The after effects of the global pandemic are still being sustained by the economy.
- Russia-Ukraine war: The war is extensively affecting the economy and financial system of India. Even after keeping a neutral political stance and limiting imports and exports from Russia and Ukraine, the dispute is negatively affecting the GDP growth of the economy. As the global crude prices have reached an all time high, India’s stability is at a risk.
How have these events affected the Indian Economy?
A global hike in crude oil prices will mean higher domestic inflation for Indian markets. According to the RBI, inflation in FY2022-23 is expected to be 4.5%. Rising commodity prices for metals, fuel, edible oil, and various other products are early indicators of this trend. In addition, the rise in consumer inflation can arrest discretionary consumer spending and investments. This is further expected to cause an increased current account deficit, which will weaken the value of the rupee in comparison to the dollar.
Increasing Interest Rates:
The RBI will revise interest rates for banks to protect the weakening rupee. As a result, both secured and unsecured credit like home loans, auto loans, personal loans, etc, will become expensive. At the same time, the rate of return on products like fixed and recurring deposits will improve, encouraging consumers to spend less and save more.
Share market volatility: As global supply chains are disrupted due to crude oil price hikes, share market investments have seen a decline, resulting in extreme unpredictability. The improved interest rates on bank deposits may also drive investors towards these financial instruments and away from the mercurial stock market. Secondly, unlike the bullish market sentiment of 2021, which saw the launch and over subscription of several mega IPOs, 2022 will likely remain bearish. This could mean fewer wealth creation opportunities for both retail and institutional investors.
Current account deficit: The country’s current account deficit is likely to touch USD 105 billion or 3 percent of the GDP this fiscal year, mainly due to continuously widening trade deficit, according to a report.
What is driving this inflation?
Inflation is at an unacceptable high level mainly due to the rise in prices of crude oil and some food and consumable commodities. The retail inflation rate reached 8% in April mainly due to two factors: Russia-Ukraine War which has led to increase in price of petrol and diesel and due to an increase in global demand of food commodities like wheat. To elaborate the second factor, the high global demand of food commodities has made the exports profitable which has led to a shortfall of supply for the local demand and hence the prices of basic commodities like wheat and tomatoes is at an all time high.
What has the government done to control this inflation?
Government has taken many measures to control the inflation, some of them being:
- The Central government, late in May, announced a reduction in excise duties imposed on crucial petroleum commodities on petrol by Rs. 8 and on diesel by Rs. 6. This subsidy will result in the GOI losing around Rs.1 lakh crore in revenues in a full financial year.
- Secondly, for food price inflation, the GOI has restricted the exports of commodities in question so that there won’t be a shortfall of supply for the local demand.
What are the recent policy changes proposed by the central bank?
- The Monetary Policy Committee (MPC) on 8 June Friday increased the repo rate by 50 basis points to 5.40 percent. It also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.
- Consequently, the standing deposit facility (SDF) rate is adjusted to 4.65 percent and the marginal standing facility (MSF) rate and the Bank Rate to 5.15 percent.
- These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of 2-6 percent, while supporting growth.
But even after discussing this there are some questions we need to address to get a clarity about the current picture of the Indian economy : Is the situation really under control as claimed by the RBI Governor? Is the economy really stable?
Are the measures taken by RBI and the government enough to maintain the stability?