Watch the price line – The Hindu BusinessLine

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Inflation control must be top priority for the government

Inflation control must be top priority for the government | Photo Credit: Kagenmi

Underwhelming Q3 GDP figures underscore the importance of price stability for growth

The 5.4 per cent in third quarter GDP comes as a distinct disappointment since the economy had displayed signs of revival following the second wave of the pandemic. With the Omicron variant of the virus further dampening growth in the fourth quarter, India’s 2021-22 GDP growth is expected to wind up at 8.9 per cent, against 9.2 per cent projected in the first advance estimates. The latest GDP print reveals several pain points. Growth in construction sector was minus 2.8 per cent and manufacturing grew by an anaemic 0.2 per cent. Agriculture output growth was lower than in preceding quarters, at 2.6 per cent. As analysts have observed, consumption of steel and passenger and commercial vehicles is either stagnant or in negative territory. The growth in the third quarter is primarily led by private final consumption which is up 7 per cent, with its share in GDP expanding to 60 per cent. But government spending on capex appears to have lost momentum with gross fixed capital formation growing at just 2 per cent.

It is tempting to argue that with Covid more or less receding from the horizon for now, the next fiscal will post a robust recovery. The IMF’s World Economic Outlook had in January pegged India’s growth at 9.1 per cent and 7.5 per cent for FY22 and FY23 respectively, the highest growth projection among countries. There is also some room for optimism on the growth front going by incoming data. Private investment is perhaps just starting to pick up, going by the latest Economic Survey and the RBI. The Survey observes: “Companies hitting record profits in recent quarters and mobilisation of risk capital bode well for acceleration in private investment.“ The RBI echoes a similar hope in its February bulletin noting that firms expect further improvement in capacity utilisation and overall financial situation.

However, there are two inter-related factors that can play spoilsport: the onset of inflation that can no longer be dismissed as ‘transitory’; and the uncertainties thrown up by the war in Ukraine. The imported shocks induced by the latter will stoke the embers of inflation, making it all the more incumbent on the RBI to take its inflation mandate seriously. Inflation can sink two of the three boats that drive growth: private consumption and private investment. Being sentiment and confidence driven, these will hold back if inflationary expectations are not contained — leaving the government to do much more of the heavy-lifting in terms of public spending. The challenge is to sustain green shoots, amidst geo-political uncertainties. The Centre and RBI would have to make some hard policy choices, going forward. Another round of cut in excise duty on fuel is probably needed even if revenues take a hit.. The RBI will also have to hold the currency to curb the inflation impact. The choices made should send out a clear signal that the Centre regards inflation control as a pre-requisite to achieving growth.

Published on February 28, 2022


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