CEA Nageswaran Finds GDP Growth Realistic At Crude Oil Price Range Of $70-75 A Barrel, Inflation Remains A Concern

The theme of the Economic Survey 2022 has been to maintain a four-pronged approach in keeping with most of the government’s policies since the Covid-19 pandemic, India’s new chief economic advisor V. Anantha Nageswaran said in his first press interaction on Monday, a day after assuming office.

“The theme of the policies that the government has pursued, especially in these Covid-19 years, has been a four-pronged approach: short-term support to the economy, especially to the vulnerable segment, while keeping an eye on the medium-term fiscal stability; at the same time, never to let go of the opportunity that a crisis provides to initiate structural and supply-side reforms. There has also been considerable attention and emphasis on process reforms as well. These have been the pillars of the government’s approach in dealing with the pandemic as well as to prepare the economy for a post-pandemic world,” Nageswaran said at the press briefing post the tabling of the Economic Survey in Parliament.

The survey says that a new wave in the form of the Omicron variant swept the world recently and inflation jumped up in most countries. The cycle of liquidity withdrawal was being initiated by major central banks.

According to the survey, inflation has reappeared as a global issue in both advanced and emerging economies. India’s Consumer Price Index inflation stood at 5.6 per cent Y-o-Y in December 2021, which is within the targeted tolerance band. Wholesale price inflation, however, has been running in double-digits. “Although this is partly due to base effects that will even out, India does need to be wary of imported inflation, especially from elevated global energy prices. Overall, macro-economic stability indicators suggest that the Indian economy is well placed to take on the challenges of 2022-23,” the survey said.

Achievable Growth

It has projected India’s GDP to grow in real terms by 8 to 8.5 per cent in 2022-23 based on the assumption that there would be no further debilitating pandemic-related economic disruption, monsoon would be normal, withdrawal of global liquidity by major central banks would be broadly orderly, oil prices would be in the range of $70 to $75 per barrel, and global supply chain disruptions will steadily ease over the course of the year.

“The projection that the Economic Survey has made is on the conservative side, compared to those made by other agencies. Growth naturally recovers from the fact that we have had a 7 per cent contraction in real terms in 2020-21. The base effect continues. Economic growth picks up partly because credit growth is picking up from a very low base. The corporate sector has deleveraged and profitability is good. We therefore expect capital expenditure will now build on the back of what the government has done,” Nageswaran said.

A substantial part of the recovery will be government led and may cause fiscal deficit go record a jump. Aditi Nayar, chief economist at ICRA Limited, says, “We anticipate government spending to record a robust momentum in Q4 of FY22, similar to what was seen in Q4 of FY21, especially on those items that were included in the Second Supplementary Demand for Grants, such as food and fertiliser subsidies, export incentives/remissions under various export promotion schemes (such as MEIS and RoSCTL). This will sharply magnify the fiscal deficit of the government in the last quarter, as compared to the Rs 7.6 trillion reported in the first nine months of the year.”

International Uncertainty

Crude oil prices are currently around $90 per barrel, and it is not expected to average around $80per barrel this year, according to a Reuters poll. Increasing crude prices, therefore, is a cause of concern as for growth projections. “Global oil prices are extremely volatile. From $20 just 18 months ago, it is now $90. We have taken what we think is a reasonable number looking at what the statements of IEA [International Energy Agency] and so on. This is an assumption we have fed into our calculations,” principal economic advisor Sanjeev Sanyal said.

Analysts have also raised concern about oil prices and their impact on economic recover. Vishesh Chandiok, CEO of Grant Thornton Bharat, said, “The globally heightened levels of inflation that were assumed to be due to temporary pandemic-induced supply-chain constraints have persisted for longer than expected. Crude oil prices have surged past $90 per barrel and are expected to touch $100 per barrel in 2022, which will further fuel inflationary pressures.”

According to Nageswaran, the $70-75 per barrel crude price is an average price range. He said that current financial year is not over yet and the price is now $90 a barrel. By April of the next financial year, because of the monetary policies, tightening of global liquidity, and potential for growth slowdown in developed world—the International Monetary Fund has lowered growth forecast for the whole world by 0.5 per cent to 4.4 per cent—would moderate demand for oil, he said. “Whether $90 is a price that is going to prevail for the rest of the new financial year, is an assumption. The $70-75 price band is an average range for the new financial year, and I think that is a realistic assumption,” Nageswaran said.