Balancing growth, inflation, finances and debt
The WEF annual meeting focused on challenges for economies; in the wake of the geopolitical crisis and rising prices, India’s recovery remains dodgy
Although Ukraine and geopolitics remained the primary concern at the 52nd World Economic Forum Annual conference at Davos, Gita Gopinath, first deputy managing director of the International Monetary Fund, said that the war had been a “major setback” to the recovery from the Covid-19 pandemic.
The impact on India’s gross domestic product (GDP) is yet to be determined. Going into the conference, many organisations revised their trade and growth forecasts for the world. India has not been isolated from this phenomenon. In April, the World Bank revised India’s growth outlook for 2022-23. In January 2022, while the organisation was expecting India to grow at 8.7 per cent in 2022-23, it pared down the forecast by 70 bps to 8 per cent in its April revision.
The International Monetary Fund (IMF) also revised its India growth forecast in the same period from 9 per cent to 8.2 per cent, given the risks emanating from the Russia-ukraine conflict. India’s central bank, the Reserve Bank of India, had also revised its outlook by 60 bps to 7.2 per cent in April (Chart 1).
Meanwhile, as growth forecasts were revised downwards, inflation expectations witnessed an upward swing. The April reading of inflation was nearly 8 per cent — four percentage points higher than the RBI’S target and two percentage points over its upper band limit. The RBI is expecting inflation to remain at 6.3 per cent in the first quarter of 2022-23, before falling slightly to 5.8 per cent.
In an emergency meeting in May, the RBI’S Monetary Policy Committee delivered a 40 bps rate hike. Economists expect another rate hike in the June policy meeting, as inflation remains out of bounds and commodity prices are rising. The government, on its part, cut the excise duty on fuel on May 21, to further cool down prices (Chart 2).
But rate increases are also expected to slow down growth further. Moreover, if inflation is not curbed, the government will have a bigger problem managing its finances. Coming out of the Covid-19 crisis, the government would have wanted a cushion of low inflation to kickstart growth and phase out subsidies. But faltering growth and high inflation have led to the extension of Covid-era subsidies.
In March, the government extended the Pradhan Mantri Garib Kalyan Anna Yojana — the free food grain scheme — by another six months, incurring an additional expenditure of ~80,000 crore, over and above the ~2.06 trillion budgeted for the food subsidy in 2022-23. Another sixmonth extension will translate into additional spending of at least ~80,000 crore.
Given that wheat prices are trading higher than the minimum support price, procurement costs would further raise government expenditure. But considering even the ~80,000 crore expenditure, the government’s food subsidy bill is expected to balloon to ~3.66 trillion — over three times what it spent in 2019-20 (Chart 3).
Meanwhile, sources of revenue are drying up. The government’s excise-duty cut came at a cost of ~1 trillion to the exchequer. This is when borrowing costs are expected to rise, and debt has increased. India’s debt- TO-GDP ratio is expected to be 85.2 per cent in the current fiscal year, as per the RBI’S Report on Currency and Finance 2021-22, and will not fall below the 80 per cent mark even in the next five years (Chart 4).