By Deepak Sood
The Indian economy is gripped by unprecedented inflation. According to official data, the annual inflation rate in India increased to 6.95 per cent in March 2022, the highest since October of 2020. Similarly, the wholesale price index in March at 14.5 per cent, was the second highest since 2012.
Evidently, India’s economy faces a twin challenge because the current spike in inflation is the result of the steep price rise of crude oil (crude petroleum had risen to 83.56 per cent in March from 55.17 per cent during February) and other commodities across the world. This has increased the import cost for some of the essential commodities. Moreover, following the Russia-Ukraine war, there has been a disruption in the global supply chain. Notably, India meets 85 per cent of its oil needs from imports.
The government admits that the current geopolitical situation and soaring prices may slow down growth even as inflation remains high. Ironically, this is happening at a time when the world economy is striving to emerge from the slump caused by the coronavirus pandemic and (is) steadily trying to boost the pace of growth.
Furthermore, the Ukraine-Russia war has hit edible oil supplies, leading to an increase in its prices. The pressure on sunflower oil supplies from Ukraine triggered a change in export policy from Indonesia, the world’s leading palm oil exporter. Indonesia sprang a surprise by announcing an export ban on cooking oil in response to a supply squeeze in the aftermath of Russia’s invasion of Ukraine. Consequently, it has led to lower palm oil imports.
Specifically, the Indian kitchens bore the brunt of the price rise. Besides the fuel and edible oil costs, domestic cooking gas prices shot up recently. In the past few months, prices of almost all essential items have moved northwards, thereby putting pressure on the common man’s household budget forcing the most to cut corners. Additionally, the high fuel prices have had a spillover effect on transportation and made it expensive.
Recently, as part of its anti-inflationary measures, and for the first time since 2018, India’s central bank, the RBI, raised the repo rate by 40 basis points to 4.4 per cent. The RBI had last reduced rates in March 2020 to help the economy mitigate the risks of the Covid pandemic.
Significantly, the central bank’s rate hike is to control and monitor money flow into the banking system in the face of a global economic downturn. The RBI believes that for the Indian economy to remain steadfast on its path to sustainable and inclusive development, inflation must be brought under control.
Consequently, due to the rise in the repo rate, bank loan EMIs will go up and affect the pocket of the consumer who will be compelled to pay more every month, which he could have otherwise saved or invested and earned a return on. Therefore, investment decisions need to be wise. To counter negative growth, a customer needs to choose investment instruments that generate returns higher than the inflation rate.
Supply chain disruptions across the world are leading to inflationary pressures. The increases in labour, energy, and transport prices are contributing to worldwide inflation affecting difficult policy challenges. The global supply chains are interconnected – when one price goes up, others have a tendency to follow. Increases in cost of labour, energy and transport around the world is further contributing to inflation.
Owing to the Omicron wave and the Ukraine crisis, there is uncertainty. Hence, supply disruptions could last longer and may trickle down into 2023. As companies navigate a risky trading environment, supply chains are adapting. The general sentiment is that global trade may pick up and the main reason for this optimism is the growth of technology to ease supply chain issues, especially the adoption of 5G to increase connectivity. Digitalisation and automation can also streamline operations and increase trade efficiencies.
India is a consumption-driven economy and high inflation will potentially have a bearing on its growth and resources. Thus, the country needs to work on a growth trajectory. With bumper food crop production during the rabi and kharif seasons in 2021-22, the pressure on food grain inflation is likely to ease. Furthermore, there is a need to increase domestic edible oil production to ease the pressure on imports.
As regards to supply chain disruptions, there is a need to either look at near-shoring of supply centers or at producing the components domestically. Most importantly, employment generation and addressing challenges and opportunities of the climate crisis are required to stay on the growth track. Significantly, agriculture is an enormous opportunity for the country. Increasing farmers’ income and boosting the country’s agriculture exports are good focus points to offset the potential headwinds to counter inflation.
While domestic factors can be mitigated, it is the external pressures that are needed to be in focus. Offsetting the potential economic headwinds, flagship government projects like GatiShakti and Production Linked Incentive Schemes will drive investments. To ensure the security of crude supplies and to mitigate the risk of dependence on oil imports from a single region, India has been focusing on expanding its petroleum basket across West Asia, Africa, and North and South America.
(Deepak Sood is the Secretary General at The Associated Chambers of Commerce and Industry of India, ASSOCHAM)
