India faces near-term trials, stagflation risk low: Finance ministry

NEW DELHI: India faces nearterm challenges which need to be managed carefully without sacrificing hard-earned

macro-economic stability

, the finance ministry said in its monthly economic report. It asserted that the country faces a low risk of

stagflation

owing to its prudent

stabilisation policies

.

The monthly report for May said India faces nearterm challenges in managing its fiscal deficit, sustaining economic growth, reining in inflation and containing the current account deficit. This, while maintaining a fair value of the

Indian currency

.

“Many countries around the world, including and especially developed countries, face similar challenges. India is relatively better placed to weather these because of its financial sector stability and its vaccination success in enabling the economy to open up. Further, its medium-term growth prospects remain bright as pent-up capacity expansion in the private sector is expected to drive capital formation and employment generation in the rest of this decade,” said the report prepared by the department of economic affairs.

It said that the world is looking at a distinct possibility of widespread stagflation but added the risk is low for India due to robust policies. Both retail and

wholesale price inflation

is high but there are prospects of robust growth.

The report said

RBI

’s monetary policy is now fully dedicated to reining in inflation pressures. It is raising repo ra- tes and withdrawing excess liquidity after inflation has remained persistently above 6% for four consecutive months. Around the same time, the government also shared the heavy lifting for inflation control by effecting duty cuts and targeting subsidies to protect the needy against the price rise, it said, referring to steps taken by the Centre to tame stubborn inflationary pressures.

The report said the imported components of high retail inflation in India have mainly been elevated global prices of crude and edible oil. Locally, the onset of the summer heat wave has also contributed to the rise in food prices.

However, going forward, international crude prices may be tempered as global growth weakens and the Opecincreases supply. But, the timing of this remains uncertain and there are also upside risks to oil prices as Opec supply will not be enough to match the shortfall caused by potential withdrawal of Russian crude from the market. International edible oil prices may also decline with Indonesia withdrawing the export ban on crude palm oil exports and further committing to lowering export taxes to encourage shipments.

“Finally, as heat wave gradually gives in to expected timely arrival of southwest monsoons sending newer crops to the Mandi, food prices and consequently headline retail inflation are expected to decline. Early evidence of that was seen in May with retail inflation easing from 7. 8% in April to 7% in May and food inflation dropping from 8. 3% to 8%,”the report said.

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