Ukraine-Russia conflict poses two major challenges to the Indian economy – for overall growth on one hand and inflation on the other, a Finance Ministry report said in Thursday. The report, however, remained optimistic about the domestic economic momentum lowering the impact of external challenges.

“Elevated prices of energy and other commodities and supply side disruptions due to Russia-Ukraine conflict pose a challenge to the growth trajectory. They also pose upside risks to inflation,” the Monthly Economic Review (MER), prepared by Economic Affairs Department said. Further, it mentioned that the magnitude of the impact would depend on the persistence of high prices.

All eyes on RBI

These remarks have come at a time when many of the global and domestic agencies have cut down the growth projection. Global rating agency Fitch lowered growth forecast for FY23 to 8.5 per cent from 10.3 per cent on sharply higher energy prices. Moody’s Investor Service cut growth forecast by 40 basis points to 9.1 per cent for calendar 2022. India Ratings & Research (Ind-Ra) expects GDP to grow at 7.2-7 per cent as against previous estimate of 7.6 per cent. All eyes are now on the RBI Governor Shaktikanta Das who is expected to present the resolution by Monetary Policy Committee on Friday and it remains to be seen whether the GDP growth rate is to be revised from 7.8 per cent.

Inflation worries

On inflation, retail inflation based on Consumer Price Index (CPI) is ruling over RBI’s tolerable range of 6 per cent while the wholesale inflation based on Wholesale Price Index (WPI) is in double digit for the last 11 months. With surge in fuel prices at pump level, a report by Ind-Ra says, a 10 per cent year-on-year (yoy) increase in petroleum product prices without factoring in currency depreciation is expected to push up retail inflation by 42bp and wholesale inflation by 104bp. Similarly, a 10 per cent yoy increase in sunflower oil without factoring in currency depreciation is expected to push retail inflation by 12.6bp and wholesale inflation by 2.48bp. Both these events could increase the retail and wholesale inflation by 55bp and 109bp, respectively, the Ind-Ra report said

MER too noted the surge in global crude prices. However, it said that in the spirit of Atmanirbhar Bharat, which places national economic and security interests above any other consideration, the Government is exploring all viable options, including import diversification, to procure crude at an affordable price. “Affordability is desired as even the present level of international crude price, should it persist for a long time, may come in the way of India achieving a real economic growth rate north of 8 per cent in FY23,” it said.

Still, MER is optimistic as it said that India’s economy, having swiftly recovered in 2021-22, after the pandemic induced contraction, may prove resilient owing to government’s thrust on capital expenditure and improved corporate sector’s financial health. “Domestic economic momentum witnessed in government capital expenditure, rise in GST collections and import of capital goods offer comfort that the impact on the Indian economy may turn out to be tolerable,” it said while adding that GatiShakti and Production Linked Incentive Schemes will drive investment, which will combine with supply chains strengthened by structural reforms.

However, economists feel that headwinds are too strong especially in terms of inflation. Sunil Kumar Sinha, Principal Economist with Ind-Ra said: “Now there is no base effect available for retail or wholesale inflation. At the same time, corporate are not absorbing the price increase which will further fuel the inflation, so government has very limited options,” he said.

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