The Indian economy has grown, braving the covid pandemic and the ongoing Russia-Ukraine conflict that led to global inflation. However, the road ahead will not be a rosy one for the government as the cloud of price rises is looming large. The economic growth of India slowed to the lowest in the financial year 2021-22 during the January to March period or the fourth quarter. This pulled down the gross domestic product (GDP) growth in the full fiscal 2021-22 to 8.7 per cent, according to the data released by the National Statistical Office (NSO).

The GDP growth for quarter 1 of FY2021-22 (April-June) was at 20.3 per cent, for quarter 2 (July-September) at 8.5 per cent, for quarter 3 (October-December) at 5.4 per cent, and quarter 4 (January to March this year) at 4.1 per cent.

For the full year (April 2021 to March 2022), the country’s economic growth of 8.7 per cent was lower than the 8.9 per cent the government had projected three months back. First, the Covid-induced curbs and then the war in Ukraine added to higher commodity prices and a supply squeeze.

The economy contracted by 6.6 per cent in the financial year 2020-21.

ECONOMIC FORECAST

Economists said the outlook for the current fiscal year (FY2022-23) remains clouded as global crude oil prices have hardened back to $120 per barrel after increased sanctions on Russian oil.

The economy’s near-term prospects have been affected by a spike in retail inflation, which hit an eight-year high of 7.8 per cent in April. The surge in energy and commodity prices caused partly by the Ukraine crisis is also squeezing economic activity.

According to Rumki Majumdar, Economist, Deloitte India, the difference between the real and nominal GDP suggests that inflation has been a persistent problem, and the economy has been fighting the challenge of rising prices for a long time now, PTI reported.

“The government’s intervention in the form of duty cuts on imports, subsidies on fertilisers and cooking gas, duty cuts on fuels to protect consumers and businesses from high inflation is likely to impact the fiscal deficit in the coming quarters,” Majumdar said.

Garima Kapoor, an economist at Elara Capital, said a slowdown in global growth, elevated energy prices, a cycle of rising interest rates and a tightening of financial conditions would all be key headwinds.

She revised lower her annual economic growth forecast for the current fiscal year that started on April 1 to 7.5 per cent from an earlier estimate of 7.8 per cent, as per a Reuters report.

“With rising inflationary pressures, the consumption recovery remains under a cloud of uncertainty for 2022/23,” Sakshi Gupta, principal economist at HDFC Bank, was quoted as saying by Reuters.

INFLATION

The economy’s near-term prospects have darkened due to a spike in retail inflation, which hit an eight-year high of 7.8 per cent in April. The surge in energy and commodity prices caused partly by the Ukraine crisis is also squeezing economic activity.

“Inflation pressures will remain elevated,” the government’s Chief Economic Adviser V Anantha Nageswaran said, as per a Reuters report.

High inflation had led to the Reserve Bank raising the benchmark interest rate by 40 basis points in an unscheduled review. It is expected to take similar measures when the Monetary Policy Committee meets for the bimonthly review on June 8.

However, the Chief Economic Adviser ruled out the risk of stagflation in India as the country is better placed than other nations. Stagflationary risk to India is quite low compared to other countries, he said.

Stagflation is the phase when both inflation and unemployment rates are high with moderation in GDP growth.

POSITIVE FACTORS

Momentum in the service sector will be one of the key drivers apart from the government’s focus on enhancing public capital expenditure.

During quarter 4, private consumption expenditure grew by 7.9 per cent, reflecting some impact of pent up demand. There was also a revival in contact-intensive services in the last quarter which has helped the GDP print reach respectable levels.

Separately, the eight core infrastructure industries grew by 8.5 per year-on-year in April 2022, a six-month high. Except crude oil and steel, all other infrastructure industries recorded positive growth during the month.