Global uncertainties, India’s growth prospects 

India’s Growth performance 

As per the estimates, India’s real GDP and GVA growth are estimated to recover to 8.9% and 8.3%, respectively, in 2021-22 after the pandemic situation.  

What are the challenges for economic recovery amid ongoing geopolitical uncertainties? 

Inc in global crude oil prices may result in reduction in real GDP growth and an increase in CPI inflation in India. If the prices of other imported commodities also increase, the inflation impact will be higher. 

The demand for public expenditure may increase with respect to prices of petroleum products, fertilizer subsidies etc. Therefore, the government may face the challenge of maintaining the fiscal deficit at the budgeted level. 

It would lead to worsening of the current account balance due to higher import bills and depreciation of India rupee.

Sectoral supply-side bottlenecks and the cost escalation would be faced by certain sectors. These sectors may be fertilizers, iron and steel foundries, transportation, construction and coal which depends upon petroleum products. 

It would lead to disruption in Indian trade with Russia and Ukraine. It would be due to the discontinuation of transactions through SWIFT.  

The ongoing economic uncertainties have led to increase in the outflow of the net Foreign Portfolio Investment (FPI) from India and reduction in the inflows of net Foreign Direct Investment (FDI). 

Challenges in bearing burden of increased oil prices 

If the oil marketing companies don’t raise prices of petroleum products, then the oil sector-linked subsidies would go up.  

If the central and State governments reduce excise duty and value-added tax (VAT) on petroleum products, their tax revenues would be adversely affected.  

If, burden is passed on to the consumers and industrial users, it can impact already weak investment and private consumption. 

What is the way forward?

There should be proper rationalization of burden of higher prices of petroleum products among consumers and industrial users, oil marketing companies (OMC) and the Government in India 

Efforts should be made towards promotion of consumption growth and reducing the cost of industrial inputs.   

RBI may raise the policy rate. It can help tackling inflationary pressures and outward flow of the U.S. dollar. 

Source: The post is based on an article “Global Uncertainties, India’s growth prospects” published in The Hindu on 24th Mar 22.