Inflationary Trends are Still Far from Ideal! the Policymakers Have a Task at Hand!

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  • The global community is swamped with inflationary trends owing to certain unresolved factors which show no signs of abating. The global supply chain disruptions caused by the ongoing conflict between Russia and Ukraine are taking a heavy toll all around. Worryingly, both the warring countries are showing no inclination to scale down their aggressive disposition which could usher in much-needed respite to the universe.  Pressure tactics exerted on the Russian strongman Vladimir Putin has yielded little results vis-à-vis backing out from the unwarranted aggression. Back home, the Indian government has left no stone unturned in easing the inflationary pressure on its citizens. Welcomingly, there are palpable signs of inflationary trends easing a bit.

PC: Robert Kang

  • Let’s delve further to understand the present situation. As reported, two keenly tracked monthly economic indicators, retail inflation and exports, present a mixed picture.  Note that the consumer price index in October was 6.8%, above the RBI’s threshold of tolerance but sequentially lower.  The reduction in CPI, after a sequential rise in the preceding two months, was on account of the food price level cooling.  Indications are that this should ease the pressure on RBI to frontload increases in policy interest rates to combat inflation.  In October, merchandise exports declined by 16.7% to $29.8 billion.  While the scale of the contraction in October was large, it’s in keeping with the recent trend.  How does this portend on our exports then?
  • Indeed, the slowdown in global economic momentum has taken a toll on India’s exports. Stripped of petroleum product exports, merchandise exports have contracted for three straight months.  The overall non-petroleum merchandise exports in April-October were $206 billion, higher by 3%.  The bright spot in the trade scenario remains services.  The April-October trade surplus in services was $75 billion, higher by 24.6%.  Experts opine that RBI should temper the increase in its policy rate, repo, which has hardened by 1.9 percentage points in the last six months.  Evidence suggests that the price level, including sticky core inflation, is being influenced mostly by supply-side challenges. Cereal inflation in October was 12% only on account of supply shocks.

PC: Anushruti Singh

  • Moreover, research by Crisil showed that 43% of MSMEs by value won’t touch pre-Covid operating profit margin this financial year as demand isn’t robust enough for them to pass on the increase in the cost of inputs. Yes, the salient feature of India’s export basket is the growing dominance of petroleum products, right from the pre-Covid phase.  Today, it comprises 22% of merchandise exports.  Thus, fiscal and industrial policies need to place greater emphasis on labour-intensive exports such as readymade cotton garments that contribute less than 5% to the export basket.  In conclusion, India needs to focus on enhancing its inherent competitiveness and let the rupee’s exchange rate be determined by market forces.