“Rising prices remain an increased risk to growth as consumption remains subdued”
“Rising prices remain an increased risk to growth as consumption remains subdued”
India’s retail inflation could average below 6% even if crude oil prices average $100 a barrel in 2022-23, but rising prices remain a heightened risk to growth, especially as private consumption remains subdued, ratings agency Crisil said on Thursday.
Assuming full pass-through of global crude oil prices to retail fuel prices in India, Crisil expects consumer inflation to average 5.4% when oil prices average $85-$90 a barrel and rise to 5.8% when the median crude oil price stands at $100 a barrel barrel through the next fiscal year.
However, headline inflation is expected to be lower than the last time oil prices shot above $100 a barrel in 2012-14, a time when food and core inflation were also high, Crisil noted, adding that such a scenario will likely not repeat in 2022-23.
“At that point, CPI inflation was in the 8-10% range… This time around, inflation should be lower due to lower core and food inflation, which together account for 86% weight in the CPI,” Crisil said in his 2022 India Outlook -23.
Fuel inflation would also weaken due to the base effect of high petroleum product prices ahead of excise tax cuts announced in November 2021, the agency noted. However, he warned that core inflation would remain stubborn as firms try to pass higher input costs on to customers and services inflation would catch up after activities normalized. Urban poverty has been hardest hit by high inflation in recent years.
Crisil kept its growth estimate for the next fiscal year at 7.8%, although the Ukraine-Russia conflict multiplied existing downside risks such as US interest rate hikes and noting that private consumption was the weak link in India’s “nascent and uneven” economic recovery Remained by the pandemic, the agency advocated more fiscal support to boost consumption.
“Although private consumption will receive some support from the normalization of activity in the coming fiscal year, we believe that fiscal policy may need to be used more aggressively than envisaged in the Union budget,” said Crisil Chief Economist Dharmakirti Joshi. “This can be done by increasing appropriations for job-creating programs, providing subsidies for food, and lowering tariffs on petroleum products,” he added.
Fiscal support could provide a bridge for those hardest hit by the pandemic until positive spillovers from investment-led growth play out in the labor market and private consumer demand becomes self-sustaining, he added.
