Data released over the past two days indicate that the Indian economy, although better off than most other major economies, is still in a difficult situation. Retail price inflation continued to rise slightly in September and industrial production growth in August slowed. Meanwhile, IMF forecasts estimate that India’s economic growth in 2022-23 will be 6.8%, which represents a reduction of 1.4 percentage points since the April forecast. All of this requires skillful economic management as it is a situation where supply shocks put upward pressure on the price level while demand remains fragile.

The CPI for September was 7.4%, the ninth month in a row that it exceeded the RBI’s upper tolerance threshold of 6%. In this set of data, the most worrying aspect is the pressure coming from food inflation. It was 8.6% in September, driven mainly by cereal inflation of 11.5%. This is due to a supply shock that came from an abnormal climatic regime during the harvest phases. Given this, the GoI’s decision to continue providing free grain for some time should act as a brake on the upward pressure on the grain price level.

Domestic supply shocks that drive up food prices make RBI’s job harder. There are cross-currents at play. It is true that the contraction in industrial production in August was based on an elevated base. Despite this, the ongoing monetary tightening will have a negative impact on demand. However, if food prices remain high for a long time, there may be second-round effects. This makes RBI’s job more difficult, especially when it comes to the timing of policy easing. RBI must also grapple with the impact of currency depreciation on oil imports and the resulting pressure on domestic inflation. It is a very uncertain situation, with the conflict in Ukraine making matters worse.

The Indian government and the states can alleviate the problems through sensible fiscal measures. The phase of populist giveaways is over. In an uncertain scenario, financial markets can be ruthless in the face of fiscal slippages. The Indian government and most states this fiscal year have tried to rein in current consumer spending. But there should be no reduction in budgeted capital expenditure. It is an engine of growth, especially when the private sector will be reluctant to invest in such uncertainties. The GoI led the way with a 47% increase in capital expenditure in April-August to Rs 2.52 lakh crore. States must also increase their investment spending.


This article appeared as an editorial opinion in the print edition of the Times of India.