Upside risks to CPI inflation likely to outweigh downside risks: Eco Survey

The Economic Survey for 2022-23 has said the upside risk to inflation in India may outweigh the downside threats even if inflation challenge in FY24 will be less stiff than the previous year.

The Reserve Bank of India (RBI) projected inflation at 6.7 per cent for the current fiscal year and 5 per cent and 5.4 per cent for the first and second quarter of FY24, assuming a normal monsoon.

The Survey, which was tabled in Parliament on Tuesday by Finance Minister Nirmala Sitharaman, noted that India’s inflation management is ‘noteworthy’ and can be contrasted with advanced economies.

Due to the anticipated slowdown in advanced economies, inflation risks coming from global commodity prices are likely to be lower in FY24 than in FY23. However, in terms of overall risks to the benign baseline view on inflation, upside risks to India's projected rates may outweigh the downside risks,” the report said.

The Survey cited the example of resurgence of Covid-19 pandemic in China, which could lead to supply-side disruptions. On the other hand, there could be a surge in commodity prices if normalcy returns to China.

“Further, the probability of a soft landing in the US economy has risen in recent months, and that might keep up the US demand for oil. Similarly, the geopolitics associated with oil can particularly affect our imported inflation,” it said.

The RBI has increased the policy repo rate by 225 basis points to 6.25 per cent since May 2022 to tackle inflation. Though inflation has seemed to have peaked but core inflation remained sticky at 6 per cent. The monetary policy committee is expected to deliver another 25 bps rate hike when it meets next week, before taking a prolonged pause.

Overall, the Survey said, the inflation challenge in FY24 “must be a lot less stiff than it has been this year”.

The Survey pointed to three phases of CPI inflation in 2022 – a rising phase up to April when it hit 7.8 per cent, then a steady phase of around 7% till August and then declining to around 5.7 per cent in December.

“The rising phase was largely due to the fallout of the Russia-Ukraine war and a shortfall in crop harvests due to excessive heat in some parts of the country. Prompt and adequate measures by the Government of India and RBI have reined in the rise in inflation and brought it within the Central Bank’s tolerance limit,” the Survey said.

The mandate of the central bank is to keep retail inflation at 4 per cent, within a band of 2 per cent on either side. Average inflation for three quarters in 2022 – January-March, April-June, and July-September – was higher than 6 per cent, which is seen as a failure of the RBI.         

Apart from monetary policy tightening, the Survey highlighted several measures by the government to tackle inflation, such as the reduction in excise duty on petrol and diesel, prohibition of the export of wheat products, imposition of export duty on rice, cut in import duties and cess on pulses, among others.