Latest scenes from a Chinese city where lockdown is imposed due to spread of Covid-19
The headlines have been dominated by dismal news about the economy in recent days. Inflation is the biggest culprit followed by the impact of global supply disruptions due to the Ukraine war on trade and industry. Growth projections for the current fiscal have been downgraded by nearly every agency including the Reserve Bank of India which now expects growth to be of the order of 7.2 percent as against 7.8 percent earlier. But credit rating agency, ICRA has flown in the face of the generally pessimistic outlook and projected that the first quarter (April to June 2022) would end on a positive note. It assesses that these three months will record a steep rise of 12 to 13 percent despite all the headwinds facing the economy. It adds, however, that the growth momentum will slow down in subsequent quarters. It thus anticipates an overall increase of 7.2 percent GDP growth for 2022-23 fiscal.
ICRA’s chief economist Aditi Nayar said the agency based its assessment on its business activity monitor for April which has touched 115.7 indicating that activity was roughly 16 percent higher than a year ago or pre-Covid levels, despite global headwinds. This is expected to persist in May, giving rise to its optimistic projections for the first quarter. But it could moderate in subsequent months, hence the annual growth projection has been pegged at a more conservative level.
ICRA is an independent and professional investment and credit rating agency that was set up as a joint venture between Moody’s and several Indian commercial banks and financial services companies.
The overview presented by the agency is significant as it reflects the fact that business activity has been rising rapidly over the past few months despite the impact of geopolitical developments. These include not just the Ukraine conflict but also the Covid curbs in China and the tightening money supply policy of the U.S. Federal Reserve. These factors have all impinged on the overall outlook here but probably the most ripples have been created by the inflationary pressures stemming from the war. These have been largely due to the surge in global oil prices that have brought the Brent benchmark crude hovering in the region of 100 dollars per barrel. Though this is lower than earlier dire predictions that prices would touch 130 dollars per barrel, it is still far above budgetary assumptions of about 70 to 80 dollars per barrel made by policymakers in this country.
The soaring crude oil prices have translated into enhanced retail prices for petrol, diesel, and LPG. This in turn has had a cascading effect on prices as any hike in diesel prices impacts the transport of all commodities. The pass-through effect of fuel price increases has led to headline inflation reaching as high as 7.7 percent in April. The central bank reacted by shifting its focus from growth to inflation and rising interest rates for the first time in four years.
Fuel is not the only area where prices have risen beyond expectations owing to the conflict in Europe. Food prices have also shot up with edible oils leading the way owing to shortages in global availability. Rising wheat prices have pushed the government to restrict exports though this could affect farmers’ incomes in the short run. Sunflower oil supplies from Ukraine have been curtailed but this hurdle could have been overcome by imports from other edible oil producers. Unfortunately, the major palm oil exporter, Indonesia imposed an embargo on sales owing to domestic shortages.
The third element on the inflation front has been the non-availability of critical raw materials and components due to global supply chain disruptions. These have pushed up the prices of these products including metals along with semi-conductors. The manufacturing sector has had to face the brunt of the shortages and higher prices, which has ended in the lower output of many industrial products including automobiles and even white goods. The latest news even indicates that the gem and jewelry industry is in trouble due to the stoppage of rough diamond supplies from Russia.
Covid-related curbs in China have also affected global trade flows. The supply of components from that country has faced disruption, affecting industries here. And finally, the aggressive rate hikes planned by the U.S. Federal Reserve have brought about a flight of capital from this country’s stock markets. The combination of these factors has caused the rupee to depreciate which is not causing as much concern as it would have in the past owing to the comfortable level of the country’s foreign exchange reserves. These are in the region of 600 billion dollars which covers about ten months' worth of imports.
It is in this context that ICRA’s assessment is significant as it notes that despite all these factors, business activity was at a relatively high level in April and the momentum was expected to continue during May. Thus trade and industry have continued to be on a revival path over the past few months despite the continuing impact of geopolitical events. The external environment has had an impact on business operations but activity continues to be brisker than earlier anticipated.
The question is, will this revival of business activity continue apace during the rest of the current fiscal. Much will depend on whether inflationary pressures can be contained even as the central bank has begun to play its role by raising interest rates. The government, on its part, would do well to cut excise duties on oil products as a way of reducing the impact of high fuel prices on the economy. This is feasible right now as revenue collections are buoyant both in terms of direct and indirect taxes. It has to be conceded, of course, that inflation is a global phenomenon right now and India is bound to be caught in the same turmoil as the rest of the world. Yet cutting taxes on oil products remains a viable option and it is high time for the government to take this bold step which could be a game changer in containing inflationary pressures on the economy.