Economic Survey 2022-23 observes that India’s inflation challenge in FY24 would be less stiff than what it has been this year and that India’s inflation management has been better compared to that of advanced economies that are still grappling with sticky inflation rates. The survey says that it expects monetary and fiscal authorities would continue to remain proactive and vigilant as they were this year.
The survey, authored by India’s chief economic advisor V Anantha Nageswaran, says that 2023 would have less macroeconomic volatility compared to the preceding financial year. “Both CPI-C (retail inflation) and WPI (wholesale inflation) have fallen below 6 per cent (which is the RBI tolerance limit for the former) and are on the descending slope of the surge that hit the economy in the first half of the current fiscal. International crude oil prices, the principal drivers of inflation this financial year, have returned to normal levels and so have prices of other major commodities. RBI projects CPI inflation for Q1 - FY24 at 5.0 per cent and for Q2 -FY24 at 5.4 per cent on the assumption of a normal monsoon,” the survey says.
The survey says that as advanced economies are expected to go through slowdown, inflationary risks from global commodity prices are expected to be lower in FY24 compared to the ongoing financial year. However, upside risks to India's projected inflation is expected to outweigh the downside risks. The re-emergence of Covid-19 in China might trigger supply chain disruptions again but if China returns to normalcy, commodity demand is expected to surge, which could reverse the recent easing seen in commodity prices. “Further, the probability of a soft landing in the US economy has risen in recent months, and that might keep up the US demand for oil. Similarly, the geopolitics associated with oil can particularly affect our imported inflation,” the survey says.
Core inflation is expected to remain sticky at nearly 6 per cent and is a result of second-round impact of the supply shocks experienced earlier this year. The Reserve Bank of India forecasts that domestic prices for spices and cereals would remain elevated near term because of supply shortages and that price of milk is also expected to increase due to high feed costs. “In general, climate across the world has become increasingly erratic, further fortifying upside risks to food prices. A lot depends on industrial input prices: they may ease, but on the flip side their delayed pass-through to consumer prices may contribute to the stickiness of core inflation,” the survey says.
The survey says that rural inflation has been higher than urban inflation throughout the ongoing financial year, reversing the trend seen during the pandemic years. Consumer price-based inflation in food cooled after a high of 8.3 per cent in April 2022 as global food prices moderated and a reduction in farm input costs. But the cooling was more pronounced for urban inflation, softening to 2.8 per cent in December.
“Rural fuel inflation was lower than its urban counterpart throughout FY23, due to subdued price pressures on traditional fuel items such as firewood and cow dung cakes as opposed to petrol and diesel. 5.16 While the current fiscal year saw rural and urban inflation closely tracking each other, FY22 had seen a wider differential between the two. The gap between rural and urban inflation reached its widest in March 2022 due to a difference in the experience of food inflation. Urban areas experienced a sharper increase in food prices of vegetables and oils during this time as compared to the hinterlands,” the survey says.
The survey also says that though the current financial year saw rural and urban inflation closely tracking each other, the differential between the two was wider in FY22. The gap between rural and urban inflation was at its widest in March because of the difference in the experience of food inflation.
