Friday, August 19, 2022

Economy under stress

It is not only India’s retail inflation rising to 7.79 per cent in April, the highest since May 2014 but also the falling rupee to the dollar which has breached the Rs.80-mark. These two negative factors are posing serious concerns for the economy. Inflation has been around for sometime but the government as well as the government-controlled Reserve Bank of India has been giving figures during the past year that do not reflect the correct picture. In simple words, inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. On this, the government has said its own agencies have provided the statistics but independent economists have always cautioned the government against trying to paint a rosy picture since there has to be basis for the pronouncement of India becoming the dream $5 trillion economy and global powerhouse by 2024-25.Such a claim was reiterated by Chief Economic Adviser (CEA) V. Anantha Nageswaran on June 14 , when he said India would become a $5 trillion economy by 2026-27 and $10 trillion by 2033-34. If the inflationary trends either continue or remain within the 6.5% to 7% region, it would be difficult to foresee the country achieving the objective. The current inflation has been driven by steeper edible oil and supply chain disruptions owing to the Russia-Ukraine war are responsible for rising prices. Since the start of 2022, as crude oil and other commodity prices have started rising in the wake of the war in Ukraine, India’s CAD has widened sharply. The retail inflation in India marginally eased to 7.01% on an annual basis in the month of June, from 7.04% in May, owing to easing crude and edible oil prices. The overall food inflation came in at 7.75% in June as compared to 7.97% preceding month. The Indian rupee breached the psychologically significant exchange rate level of 80 to a US dollar in early trade on July 19. A Bloomberg report stated that , the rupee declined to Rs.80.06 per dollar and was weakening against the dollar because in the market there is a greater demand for dollars than there is for the rupee. This increased demand for dollars vis-à-vis the rupees is, in turn, happening due to two factors. One, Indians importing more goods and services than what they export. This is what is called Current Account Deficit (CAD). When a country has it, it implies that more foreign currency (especially dollars) are flying out of India than what is coming in. The other factor is falling investments in the Indian economy. While foreign investments in India had picked up well but it gradually declined by beginning of 2022. This has happened because the interest rates in the US are rising much faster than in India. The Modi government admits that the current geopolitical situation and soaring prices may slow down growth even as inflation remains high. Ironically, this is happening at a time when the world economy is striving to emerge from the slump caused by the coronavirus pandemic and (is) steadily trying to boost the pace of growth and the jury is out whether the optimism for achieving the much-hyped $5 trillion economy makes economic sense.

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