Resurgent inflation risks disrupting the country's GDP calculations

- Challenging situation for the country due to high crude oil prices, global recession and uncertain monsoon

The country's economic growth rate was better than expected at 7.20 percent in the last financial year. The expectation was seven percent. In view of the high economic growth rate of the financial year 2022-23, the Gross Domestic Product (GDP) figure for the current financial year was being presented at the beginning of the current financial year to be attractive. However, as the current year's monsoon is uncertain in the country, due to the increase in the prices of food grains, pulses and vegetables, policymakers are wondering if the exercise of the Reserve Bank to reduce inflation in the last financial year has failed.

In view of the high inflation, the Monetary Policy Committee (MPC) of the Reserve Bank of India unanimously decided to keep the repo rate unchanged in its August meeting as well. However, the inflation estimates for the current financial year have been forced to increase, while the economic growth rate assumptions have been maintained. MPCA decided to keep repo rate at 6.50 percent for the third time in a row. But the inflation estimate for the current financial year, which was earlier set at 5.10 percent, has been increased to 5.40 percent. The work of bringing inflation under control has not been completed yet, the Reserve Bank said.

Globally, inflationary risks remain due to high food prices, geopolitical tensions and climate related uncertainty. Food prices are also expected to come down in the fourth quarter of 2023. The RBI has also hinted at tightening monetary policy if food prices push inflation higher.

In order to control the high inflation, the interest rate was increased by a total of 2.50 percent in the last financial year. The effect of which was also seen in the first two months of the current financial year. However, since then retail inflation has increased in June-July and is expected to increase in August as well. Due to the effect of El Nino, if the rainfall is less in the remaining two months, the possibility of impacting the production of pulses is not ruled out. Interest rate hikes were forced to bring down inflation, but higher prices of pulses and vegetables have upset the Reserve Bank's inflation calculations for now. After falling to 4.30 percent in May, inflation has started rising again since June. July inflation hit a fifteen-month high of 7.40 percent. Which inflation is much higher than the maximum limit of 6 percent of the Reserve Bank. The Reserve Bank is hopeful that prices will return to normal with an increase in supply in the next few months keeping in mind the cropping cycle of vegetables. In the period of Corona, the overall growth rate of the country may have been negative but the agriculture sector remained in the positive zone. The rural economy was becoming the savior of the country's economy in the first wave with the strong performance of the agricultural sector. However, the monsoon conditions were good that year. While in the current year, the possible effect of El Nino will have to be monitored. Fifty percent of the country's total income comes from the rural economy. In terms of employment, more than fifty five percent of the country's people are involved in agriculture and its allied sectors. In such a situation, the impact on income in the agricultural sector can be said to mean impact on the demand for goods and services.

Analysts believe that if inflation remains higher than 6 percent for two consecutive quarters, then an increase in the interest rate can be seen. If the interest rate increases instead of reducing it again, its impact on demand and return on GDP will not be felt. However, in its final meeting, the Reserve Bank has maintained its estimate of the economic growth rate for the current financial year at 6.50 percent.

RBI expects retail inflation to remain above five percent till the first quarter of FY2025. Based on this fact, there is a possibility that the earliest reduction in the interest rate will be seen in the second quarter of the financial year 2025. The success of this assumption depends more on the current year's monsoon conditions. The price of crude oil has also started to rise again in Adhura, the effect of which is not to rule out the possibility of seeing an increase in transportation costs in the country. In the last financial year, the country was receiving crude oil from Russia at a discount, a benefit that has been lost in the current financial year. Russia has completely reduced the discount on crude oil due to which India's crude oil import bill may remain high in the current financial year.

It would not be wrong to say that it will not be wrong to say that it will not be easy for India to achieve the estimated economic growth rate of the current financial year due to the challenges emerging at the global level as well as at home.