Indian economic growth in one year low due to inflation, Ukraine war

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The short-term outlook for the economy has deteriorated due to the spike in retail inflation, which reached an eight-year high in April.

India’s economic growth slowed to a one-year low in the first three months of 2022, hit by weakening consumer demand amid rising prices, which could complicate the central bank’s job of curbing inflation without harm growth.

Gross domestic product grew 4.1 percent year-on-year in January-March, government data released Tuesday showed, in line with economists forecasting 4 percent in a Reuters poll, and growth of less than 5.4 percent in October-December and a growth of 8.4 percent in July-September.

The short-term outlook for the economy has deteriorated on the back of a spike in retail inflation, which reached an eight-year high of 7.8 percent in April. The sharp rise in energy and commodity prices, partly caused by the crisis in Ukraine, is also weighing on economic activity.

“Inflationary pressures will remain high,” V Anantha Nageswaran, chief economic adviser at the Ministry of Finance, said after the data was released, adding that the risk of stagflation – a combination of slow growth and high inflation – was low in India.

Rising energy and food prices have hammered consumer spending, the economy’s main driver, which slowed to 1.8 percent in January-March from a year earlier, from an upwardly revised growth rate of 7.4 percent in the previous quarter. , Tuesday’s data showed.

Garima Kapoor, an economist at Elara Capital, said a slowdown in global growth, increased energy prices, a cycle of rising interest rates and a tightening of financial conditions would all be major headwinds.

It updated its annual economic growth forecast for the current fiscal year, which began April 1, to 7.5 percent from a previous estimate of 7.8 percent.

The Indian government has revised its annual gross domestic product estimates for the fiscal year ended March 31, forecasting 8.7 percent growth, down from its previous estimate of 8.9 percent.

The Reserve Bank of India (RBI) raised its benchmark repo rate by 40 basis points this month at an unscheduled meeting, and the Monetary Policy Committee has indicated it will make more rate hikes to tame prices.

Economists expect the MPC to raise the repo rate by 25-40 basis points next month.

Decreasing Demand

Economists said weakening consumer demand and contraction in manufacturing activities were a concern.

High-frequency indicators showed that there were supply shortages and higher input prices weighed on output in the mining, construction and manufacturing sectors, even as credit growth picks up and states are spending more.

Manufacturing output shrank 0.2 percent year-on-year in the three months ended March, from a growth of 0.3 percent in the previous quarter, while agricultural production growth accelerated to 4.1 percent from a growth of 2.5 percent in the previous quarter, data shows.

The rupee’s more than 4 percent depreciation against the US dollar this year has also made imported items more expensive, prompting the federal government to curb wheat and sugar exports and cut fuel taxes, joining the RBI. added in the fight against inflation.

“With increasing inflationary pressures, the consumption recovery for 2022-2023 remains under a cloud of uncertainty,” said Sakshi Gupta, chief economist at HDFC Bank.



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