Economic Survey: Key challenges and concerns for Indian economy

Inflation is the most important headwind.

The Survey notes that supply chain disruptions and slow economic growth have contributed to an increase in inflation. The withdrawal of stimulus in developed economies in the upcoming fiscal is likely to affect capital flows into the country.

“The surge in energy, food, non-food commodities, and input prices, supply constraints,disruption of global supply chains, and rising freight costs across the globe stoked global inflation during the year,” the economic survey said, noting that stimulus spending in developed economies and pent up demand during the pandemic could lead to “imported inflation” in India.

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Retail inflation has moderated to 5.2 per cent in the first three quarters of FY2022 from 6.3 per cent in the previous fiscal. Wholesale inflation which translates to higher retail inflation over time has risen sharply to 12.5 per cent in the fiscal so far up from 0 per cent last year and up significantly even from FY2019 which was unaffected by Covid-19 and saw wholesale inflation of 4.3 per cent. Key drivers of inflation include oils and fats as well as fuel prices driven up by high international prices of the commodities.

The economic survey noted that major economies had begun the process of withdrawing liquidity that was extended during the pandemic in the form of stimulus checks and relaxed monetary policy to stimulate an economic recovery. Higher inflation has however led to a winding down of pandemic related stimulus.

“The likely withdrawal of liquidity by major central banks over the next year may also make global capital flows more volatile,” the survey said, noting that this may adversely affect capital flows, putting pressure on India’s exchange rate and slow economic growth. India’s large and rising imports are also likely to put pressure on India’s exchange rate if capital flows to India decrease as a result of a withdrawal of stimulus in developed countries.

A lack of jobs also continues to be among the primary concerns for the Indian economy with unemployment levels and labour force participation rates remaining worse than pre-pandemic levels.

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According to data from the Periodic Labour Force Survey (PLFS), while the unemployment rate and labour force participation rate have improved somewhat from the start of the pandemic, they had still not recovered to pre-pandemic levels by Q4 of FY2021. The unemployment rate which hit a high of 20.8 per cent in the first quarter of FY2021 fell to 9.3 per cent in Q4 of FY2021 but remained above the level 7.8 per cent witnessed in Q2 of FY2020 which was unaffected by the pandemic.The labour force participation rate at 47.5 per cent in Q4 FY2021 was still below the level of 48.1 per cent witnessed in Q4 FY2020.