Inflation is expected to be elevated in 2022-23 and mitigating action taken by the government and the Reserve Bank of India (RBI) may reduce its duration, the Finance Ministry said in its monthly economic review for April.
The ministry further said evidence on consumption patterns suggests that “inflation in India has a lesser impact on low-income strata than on high-income groups”.
“Evidence on consumption patterns further suggests that inflation in India has a lesser impact on low-income strata than on high-income groups. Further, since aggregate demand is recovering only gradually, the Risk of sustained high inflation is low,” the report said.
Data released on Thursday showed that retail inflation surged to a 95-month high of 7.97 per cent in April on the back of high fuel, food prices and services. Rural inflation surged to an 8-year high in April, while urban inflation rose to 18-month high.
The Finance Ministry further said that rural income and demand in the current year are set to increase with the rabi marketing season so far seeing wheat procurement benefitting 9.5 lakh farmers in 2022-23. “Rural incomes will be further boosted by agricultural exports as it registers an impressive YoY growth of 19.9 per cent in April, despite facing logistic challenges in the form of high freight rates and container shortages,” it said.
Seen over a longer time horizon, inflation in India’s economy has not been as much a challenge as is sensed from month-to-month changes, it said, adding that since aggregate demand is recovering only gradually, the risk of sustained high inflation is low.
CPI (Consumer Price Index)-based inflation during FY22 averaged 5.5 per cent, 50 basis points below the upper limit of the RBI Monetary Policy Committee’s inflation band, and lower than 6.2 per cent for FY21, the report said.
The central bank had sharply raised its inflation projection for the current fiscal year to 5.7 per cent from the earlier forecast of 4.5 per cent due to geopolitical tensions.
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The cost of restraining inflation— the slowing down of global growth— is manifested in the April update of the World Economic Outlook (WEO) of the International Monetary Fund that projects growth of global output to decline from 6.1 per cent in 2021 to 3.6 per cent in 2022 as well as 2023. “Among major countries, the WEO projects India to be the fastest growing economy at 8.2 per cent in 2022-23. Lending credence to this projection, … 2022-23 has begun with a strong growth in economic activity in April as seen in the robust performance of e-way bill generation, ETC toll collection, electricity consumption, PMI manufacturing and PMI services,” it said.
“Notwithstanding the presence of inflationary headwinds, the capex driven fiscal path of the Government, as laid down in budget 2022-23, will help the economy post a near 8 per cent growth in real GDP for the current year,” the ministry report added.
For forex reserves, it said they were at a comfortable level of $597.7 billion, providing an import cover of about 11 months for financing investment and consumption in the country. The reserves have been steadily declining under pressure from outflow of foreign portfolio investments responding to monetary tightening by central banks in advanced economies, it said.