How Modi government pushes the pedal on India’s growth story while reining in inflation

Weather-related reasons apart, the pandemic-induced sharp bust-and-recovery patterns produced unpredictable and prolonged supply-side disruptions, leading to supply-side deficits, which in turn led to cost push inflation. True, as the pandemic receded, demand saw a resurgence but more than “demand pull”, it was “cost push” inflation which wreaked havoc globally. That Central bankers kept buying bonds indiscriminately and governments kept pumping money into their economies to “pump prime” and resurrect them, only led to more speculative money finding its way into just about everything — gold, oil, bonds, commodities, wheat futures, corn futures, so on and so forth. Inflationary pressures globally, among other things, have been driven also by overheating in the aftermath of significant policy stimulus. Here again, the Modi government’s cautiously calibrated approach to infusing stimulus at the height of the Covid wave has been very effective. In sharp contrast, some of the advanced economies (AEs), the US included, unleashed gigantic fiscal stimulus packages, which were not focused and eventually ended up creating asset bubbles and soaring inflation, with very little attendant benefits. [caption id=“attachment_10127791” align=“alignnone” width=“640”]  Current inflation is a mixture of demand-pull, cost-push, and inbuilt inflation. AFP[/caption] Another major issue affecting advanced and developing economies alike is global supply chains, which continue to be severely affected by the events of the past two years. Transport costs have skyrocketed. And unlike the oil-based supply shock of the 1970s, the COVID-19 supply shocks are more diverse and opaque, and therefore more uncertain, as the World Bank’s most recent report suggests.

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In EMDEs, currency depreciation (owing to lower inflows of foreign capital and downgrades of sovereign credit ratings) has contributed to inflation among imported goods. And because inflation expectations in EMDEs are less anchored and more attuned to currency movements than in AEs, the pass-through from exchange rates to prices tends to be faster and more pronounced. But again on this count, the Modi government has done a stellar job. Brokerage firm ICICI Direct said that unlike 2013 when the rupee depreciated drastically after the US Fed announced monetary tightening, India currently holds the fourth largest forex reserves globally, at over $600 billion and also has had a surplus BOP, all through 2020 and much of 2021. In the light of abundant foreign exchange reserves and the strong performance of rupee vis-à-vis its global peers, rupee’s depreciation beyond Rs 80 per US dollar in calendar year 2022 is highly unlikely. Do note that most economists believe that even at 80, the INR is overvalued and hence there is little cause for worry at this stage. Rupee, in May 2022, has been trading in a range of Rs 77.45 and 77.72 to the dollar. The rupee is likely to face resistance near 80 levels and strengthen back to 74-75 levels in the coming months, as India seems to be in a better position to withstand any major shock from the global monetary tightening that is currently underway. Don’t forget that only as recently as on 12 January 2022, the INR was at 73.77 to the dollar. India’s forex reserves are equal to about 12-14 months of import cover. Given that the rupee has enough cushion to withstand external shocks and is unlikely to breach the 80 to a dollar level anytime soon, imported inflation on account of a depreciating rupee has been kept in check and here again, the Modi government deserves kudos for excellent handling of India’s external economy. [caption id=“attachment_10750191” align=“alignnone” width=“640”]  Rupee under pressure. ANI[/caption] India’s current account balance recorded a deficit of $9.6 billion in July-September 2021 quarter, as against a surplus of $6.6 billion in April-June 2021 quarter, but the deficit was mainly due to widening of trade deficit, with economic recovery kicking in. A major achievement of the Modi government has been reining in the current account deficit (CAD). It is a well-known fact that a higher CAD leads to imported inflation, something the Modi government has assiduously avoided. In FY18, FY19 and FY20, India’s CAD was 1.8 per cent, 2.1 per cent and 0.9 per cent of GDP respectively. In FY21 India reported a current account surplus (CAS) of 0.9 per cent of GDP for the first time in over 17 years. For a fast-paced economy like India, a CAD of 2.5-3 percent of GDP is not a problem, ideally speaking. However, one needs to be reminded that in FY13, India’s CAD had snowballed into a dangerously precarious level of 6.8 per cent of GDP, completely destroying India’s external economy and setting the stage for high inflation. Hence the Congress has no business lecturing the Modi government on handling inflation or related matters. External geopolitical factors such as the Russia-Ukraine war and the resultant supply chain disruptions have led to an increase in the prices of several essential items such as energy, food and metals. There are those who argue that since India imports a fraction of its oil from Russia, the ongoing crisis there should not have an impact on Indian fuel prices. These people miss the fact that the effect is felt on the Indian basket of crude oil, which has a direct impact on the price at which India buys oil. The price of oil available for import by India increased from about $73.3 a barrel in December 2021 to over $110 a barrel in the first week of April 2022. In March 2022, the Indian energy basket recorded its highest price at $128.24 per barrel, while Brent Crude went ballistic beyond $130 per barrel for the first time since 2008, the highest in 14 years. Even in mid-May of 2022, Brent Crude has been trading at between $110 and $113 a barrel. India imports over 83 per cent of its oil requirement. In addition, since fuel prices are relatively unregulated in India, this means external events can have a significant impact on domestic fuel prices. However, despite this, prices of petrol and diesel have not changed since 2 December 2021, for 137 days in a row. LPG prices have not changed since 6 October 2021 or 167 days. The current hikes in petrol and diesel prices come against this background. The hikes in petrol and diesel in India by 5-10 percent in early 2022 are minuscule compared to the massive rise of anywhere between 52-58 percent in other countries, in the last few months. [caption id=“attachment_10159951” align=“alignnone” width=“640”]  Geopolitics and the energy calculation. Image courtesy News18[/caption] In the US, petrol costs an average of between $4.5 and $4.637 per gallon, which is nearly 20 per cent higher than the price just a few months ago. In the UK, petrol prices have consistently been hitting all-time highs over the last month, with the latest price being between 1.6 to 1.79 pounds a litre. This is over 20 per cent higher than it was a few months ago. In Germany, the price of petrol has increased by 15 percent over the last few months alone. Retail food inflation (CFPI), which affects the common man the most, has remained benign in India through most of the year and slightly increased recently to 5.85 percent in February 2022 and 6.95 percent in March 2022, primarily due to external factors. Average inflation for the period April-March 2021-22 stood at 5.85 per cent as against 6.22 per cent in the corresponding period previous year, as in the pandemic year. In the monetary policy announced on 8 April 2022, the RBI raised its inflation projection for FY23 from 4.5 per cent to 5.7 percent and then 6.7 percent in the credit policy announced in June 2022, primarily on account of the phenomenal rise in global crude oil and food prices. Since the Modi Government took charge in 2014, inflation has remained under control. Retail inflation crossed the 6 per cent mark only eight times between May 2014 and March 2020, when the nation-wide lockdown was announced to protect the nation from COVID-19. Post-pandemic, the rate of CPI inflation crossed the 6 percent mark only rarely and that too only in response to external, largely uncontrollable factors. To set some context, it is important to note that the country experienced the worst era of inflation from 2010 to 2014 under the Congress-led UPA. Under the UPA, retail inflation was more than 9 percent in 22 of the 28 months from January 2012 to April 2014. During this time, inflation even crossed into double-digits, nine times. This was largely due to irresponsible fiscal policies, crony capitalism, and policy paralysis. Again, India’s 8.7 per cent GDP growth in FY22, in a world ravaged by the worst global pandemic in over a 100 years, is a glowing testimony to Modinomics and how Prime Minister Narendra Modi has been able to navigate India’s powerful growth story into a sustainably stronger orbit. This is the concluding part of a two-part series. Click here to read the first part. The author is an economist, national spokesperson of the BJP, and the bestselling author of ‘The Modi Gambit’. Views expressed are personal. 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