Macro stability paramount now, it’s good sign that “we have become inflation-intolerant”: CEA

Recession in the west to slow India’s export growth,supply disruptions could reappear if China comes back to global markets with full vigour.

CEA Anantha Nageswaran
Chief economic advisor Anantha Nageswaran. (File photo: ANI)

Notwithstanding the fresh global headwinds caused by aggressive monetary tightening by the US Fed, India will likely fare better than peers and other large economies in terms of medium-term growth and inflation prospects, chief economic advisor Anantha Nageswaran said on Friday. He, however, underlined the supportive role a “well-capitalised” banking sector will have to play for “sustainable and lasting” economic recovery. Ensuring finance and working capital to the MSMEs “at reasonable prices” is crucial.

Delivering the keynote address at the FE Modern BFSI Summit here, he said it is “very important to focus on ensuring macro stability, rather than pursue growth” at this juncture. This is because “as shocks come and impact, we need to keep calibrating the order of priorities with respect to the economy.”

Nageswaran, however, said since half or even two-thirds of the world economy may slip into a recession in the second half of the current year or even into 2023, there would be consequent near-term challenges for India, including a dented export growth after a “stellar” show in 2021-22. Though supply-chain bottlenecks have temporarily eased in several areas, these still remain a threat with the prospect of China coming back to world markets with renewed zest, he noted.
According to him, it is a good sign that India is now very concerned about the 7%-plus inflation rate.

“We are becoming inflation-intolerant. And that is important to stabilise inflation expectations going forward and bringing it (retail inflation) back to the range of 2-6% at the earliest possible opportunity as global conditions permit, ” he said.

Referring to the global situation, he said the current decade could be marked by geopolitical churns.

In this context, India should be able to nimbly change assumptions and forecasts to minimise shocks.
“There is clearly more talk of recession and less of soft landings (in the West), with the US and the Euro zone facing extremely high and persistent inflation…. The ongoing correction in the asset markets will inevitably have an impact on sentiments and spending decisions. These are among near-term challenges, which we will have to face over the next six months or a year, hopefully not longer,” the CEA said.

Nageswaran asserted that despite the immediate concerns over high commodity prices and downward revisions of India’s growth forecasts by various agencies including the IMF, the economic recovery is still intact. Almost all sectors, except the contact-intensive ones, have indeed recaptured the pre-pandemic levels, so banks are in a position to support medium-term economic growth.

He, however, cautioned against growth in aggregate demand outpacing the expansion in aggregate supply in the economy. The Indian economy, with a high share of fragmented constituents, remains susceptible to overheating problems, as seen in 2008, if not in 2012 too.

Nageswaran said the IMF, which has a forecast of 8.2% economic growth for India for FY23 as against 7.2% by the Reserve Bank of India (RBI), will “obviously” be revising it downwards in July.

The RBI raised the repo rate by 50 bps to 4.9% on June 8, the second hike in as many months, in a bid to rein in persistently high inflation. This preceded a 40-bps rise in early May at an unscheduled meeting that kicked off a tightening cycle.

Analysts had earlier expected an additional rate hike of 75-100 bps by the RBI through this fiscal. But some of them now feel that the US Fed’s aggressive rate hike of 75 bps could impel India’s monetary authority to go for extra rate hike of 125 bps in the current year.

Retail inflation eased to 7.04% in May from a 95-month high of 7.79% in April, as price pressure across “core” and food products moderated, partly aided by a conducive base. However, the short-term outlook on inflation remains uncertain, if not worrisome, as weather shocks and high global commodity prices could jack up supply-side pressures. Inflation is seen rising again from July once the favourable base-effect wanes.

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