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India is better placed than many other countries in terms of avoiding the risks of a potential stagflation amid increasingly hostile external environment, according to an article in RBI’s latest monthly bulletin.
In its June 2022 issue of the Global Economic Prospects, the World Bank had cautioned that the combination of feeble growth and elevated inflation raises the risk of stagflation with potentially harmful consequences for low and middle-income countries.
“With most constituents of GDP surpassing pre-pandemic levels, domestic economic activity is gaining strength.
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The authors noted that the recovery remained broadly on track, thereby demonstrating the resilience of the economy in the face of multiple shocks and the innate strength of macro fundamentals as India strives to regain a sustainable high growth trajectory.
They underscored that the recent actions by the Reserve Bank which demonstrated its commitment to price stability while supporting growth augurs well in this milieu.
Global economic conditions deteriorate
The authors observed that global economic conditions continued to deteriorate as ratcheting up of commodity prices and financial market volatility have led to heightened uncertainty.
Forecasts of global growth and inflation by various agencies paint a grim picture and it is increasingly becoming clear that in advanced economies, the war against inflation would entail significant monetary tightening, complicating the growth-inflation outlook, they opined.
“Emerging market economies grapple with the global trade slowdown, capital outflows and imported inflation.
“Some abatement of supply chain pressures and relaxation in lockdown measures by key industrial hubs have emerged as silver linings amidst the dark clouds looming over the global economy,” the RBI officials said.
Price staibility
The officials emphasised that RBI is trying to stabilise the price situation through increases in interest rates and tightening monetary and liquidity conditions when the economy is able to bear it because in the longer run, price stability is beneficial.
“Unlike the rest of the world, India is recovering and getting resilient and stronger.
“This is the best time to put the stabilising effects of monetary policy into action so that the costs to the economy are minimised,” they said.
The authors said that economic activity has gained strength in 2022-23 so far as gauged from high frequency indicators.
“Downside risks to global growth have accentuated with the risk of commodity price driven inflation turning more generalised.
“Despite global headwinds, domestic macroeconomic conditions continued to strengthen,” per the article.
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