Countries in the Asian region, including India, faces difficult policy trade-offs in the wake of the Russia-Ukraine conflict, as governments face the unenviable task of managing runaway inflation without upsetting growth dynamics, according to the International Monetary Fund (IMF).
Policymakers should, therefore, protect the most vulnerable from rising fuel and food costs while enacting economic reforms to boost long-term growth, it said in its regional economic outlook.
A surge in global oil prices caused by the Ukraine crisis will be a drag on India’s growth and increase current account deficit while driving up inflation, it said, suggesting monetary tightening to curb price expectations. Anne-Marie Gulde-Wolf, acting director of the IMF’s Asia and Pacific Department, said accommodative fiscal stance is appropriate, supporting vulnerable households and putting focus on infra investments. “Well communicated monetary policy actions are needed, probably some monetary tightening,” she said.
The IMF last week trimmed its FY23 India outlook by 80 basis points from an earlier forecast to 8.2%, citing the Ukraine war and risks from high commodity prices.
“We see the difficult policy trade offs with policymakers supporting growth, while controlling inflation. We have seen that inflation has spilled out of the tolerance band, which is an outcome of war as the country is dependent on oil and commodity imports,” said Gulde-Wolf.
India’s retail inflation breached the central bank’s tolerance limit for a third straight month in March and hit a 17-month high of 6.95%.
She also cautioned that the Asian region faces a “stagflationary” outlook, as she cited the Ukraine crisis, rising commodity costs and a slowdown in China that have served to heighten uncertainties.
Although the region’s trade and financial exposures to Russia and Ukraine are limited, its economies will be affected by higher commodity prices and slower growth in European trading partners in the wake of the war. Also, inflation is picking up when economic slowdown in China is pressuring regional growth. This is leading to the stagflationary outlook, with growth being lower than assumed earlier and inflation higher, Guide-Wolf said in an online conference in Washington.
The headwinds to growth come at a time when policy space to respond is limited, Gulde-Wolf said, adding that Asian policymakers will face a difficult trade-off of responding to slowing growth and rising inflation. The US Fed’s interest rate hikes will also pose a challenge to Asian nations that have huge exposure to dollar-denominated debt. The IMF last week said it expects Asia’s economy to expand 4.9% this year, down 0.5 pps from the January forecast. Inflation in Asia is now expected to hit 3.4% in 2022, 1 pp higher than forecast in January, the multilateral body said.