The Finance Ministry's January report on the economy said a return of El Niño could mean a weak monsoon, lower agriculture production and possibility of higher prices. “Some meteorological agencies predict the return of El Nino conditions in India this year. If these predictions are accurate, then monsoon rains could be deficient, leading to lower agricultural output and higher prices,” the report stated.
Although, India's inflation has long peaked, the report also said the impact of rate hikes is unlikely to be fully felt before 2024. And core inflation continues to remain sticky.
“The full impact of the tightening is unlikely to be realised before 2024. The softening of inflation has been gradual because the underlying (core) inflation has not yet peaked in most economies and remains well above pre-pandemic levels. It has persisted because of second-round effects from earlier shocks, robust wage growth in tight labour markets, and resilient consumption demand," the report stated.
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It also said that a further fall in inflation is likely to be largely dependent on global commodity prices softening to the pre-pandemic levels. Unless that happens, the decline in inflation could get “prolonged”.
“There have been some instances of inflation stiffening above the downward trending line. Inflation decline does not often happen in a straight line as prices are usually downward sticky. Indeed, the adjustment may prolong if global commodity prices do not gravitate to pre-pandemic levels. This could happen with consumption demand staying robust in the US, and reopening of the Chinese economy refueling global demand,” the report stated.
The economy report also takes a cautious stance on the 6.5 percent growth prediction for the next fiscal. “The Economic Survey 2022-23 projects a baseline growth of 6.5 percent for FY24, but acknowledges that risks are more skewed to the downside than the upside. The geopolitical environment remains fraught. In turn, it could cause further economic dislocation through disruptions to the supply chain channels and more,“ it said.
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