Context
Global issues such as the Russia-Ukraine Conflict, Resurgent Pandemic and Supply Chain issues are plaguing India’s road to economic recovery.
Relevance
GS-III: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Dimensions of the Article
- What does Data say?
- Reasons and Impact of Crude Surge
- Fiscal Consolidation: Challenges
- Policy Dilemma
- Way Forward
What does Data say?
- National Statistical Office (NSO) has released India’s GDP data for Q3 of 2021-2022 and Second Advanced Estimates (SAE) for 2021-2022.
- In 2020-21, real GDP and GVA contracted by -6.6% and -4.8% respectively.
- SAE show that real GDP and GVA growth are estimated to recover to 8.9% and 8.3% respectively in 2021-22.
- In 2021-22, the nominal GDP growth at 19.4% is significantly higher than the real GDP growth due to an inordinately high implicit price deflator based inflation rate of 9.6%.
- Growth of Private Final Consumption Expenditure and Gross Fixec Capital Formation in 2021-22 over 2019-20 is only 1.2% and 2.6% respectively.
- Indian Markets have seen sluggish demand which has hindered the economic recovery.
Reasons and Impact of Crude Surge
- Prices of Crude Oil surged due to the ongoing Russia-Ukraine Conflict which has seen heavy imposition of sanctions on Russia.
- Industrial demand has surged post Pandemic which again has spurred the prices of Oil.
- Inflation estimates of RBI have been significantly affected which assumed $75/barrel as the average cost of Oil in their forecast.
- Estimated impact is reduction in GDP growth by 27 basis points and increase in CPI Inflation by 40 basis points.
- This also means that other industries which use Oil as fuel or other uses will be affected.
- Inflation impact is this case will be even higher.
Fiscal Consolidation: Challenges
- Since the rise in oil prices could increase the subsidy bill of the government, fiscal deficit will widen.
- Higher import bills will also widen the Current Account Deficit.
- Sectors that draw heavily from imported products will again face cost related issues.
- Net Foreign Portfolio Investment would also get affected and FDI would fall which is not desirable.
Policy Dilemma
- Rising Oil prices has to be borne by the government, people or the Oil Marketing Companies. In any case it affects revenue collection of the governments, increases the subsidy bill of the government or hampers the demand.
- Therefore a dilemma exists where insulation from such external shocks needs to be maximized keeping in mind that it does not hinder the growth trajectory of the economy.
Way Forward
In simple terms, if growth has to be revived, maximum attention needs to be paid to supporting consumption growth and reducing industrial costs to augment capacity utilization. However, inflation needs to be checked as well. RBI may find it advisable to increase the policy rates to stop outflow of Dollars while keeping growth targets in sight.
Source – The Hindu
