GROWTH VERSUS INFLATION

Growth in Economics refers to increase in production of goods and services. Generally increase in output will generate income and employment depending upon the inputs and the nature of technology utilised in production. The availability of money supply in the economy should synchoronise with total output. Excess of money supply or liquidity is bound to create inflationary pressures. Inflation refers to rise in general price level and decline in the value of currency. Price rise may be due to increase in demand or increase in costs of production or supply constraints. Generally annual inflation rate upto 2% is termed as creeping  inflation, upto 5% as walking inflation followed by running inflation upto 10% and further galloping inflation. 

Achieving high economic growth and maintaining price stability simultaneously are difficult tasks.It has been observed that creeping or walking inflation upto 4% acts as a stimulant to carry out economic activities of production consumption savings and investments in the economy. On the contrary high inflation may tend to distort economic growth if the economy is working nearly to capacity .Inflation leads to inefficiency and reduces the incentive to make the best possible use of available productive resources. It also encourages production of  consumption goods rather than capital goods because prices of consumption goods rises faster than that of capital goods during inflationary period. In other words it can be observed that the relationship between economic growth and inflation is direct upto 4% annual inflation rate whereas it is not so or inverse beyond 4%.

The monetary policy committee of Reserve Bank of India has taken the task of maintaining inflation rate of 4%  +/-2 % in consumer Price Index which was breached in January and accelerated in February 2022 at 6.07%.Wholesale price index recorded double digit growth of 13.11% in February 2022.Food inflation quickened to 5.85%,in rural areas it was 5.87%.Meat and fish prices increased to 7.45% while vegetables recorded 6.13% increase which was very much against RBI assumption of increased supply and cooling of vegetable prices during the winter crop. Unfortunately due to war supply of edible oil from Ukraine which is the largest source of Sunflower oil supplier into India stopped and prices shot up.The prices of clothing, footwear, fuel and light and transport and communication all are running well above 8% levels. Infact the overall trend in inflation is clearly broad-based across consumption categories well above tolerance level. The uncertainty with the pump prices of fuels yet to reflect the recent upsurge in global oil prices in the wake of Russian aggression of Ukraine is likely to fuel transport and communication inflation. Price of India's crude basket already risen by over $20 a barrel since December. With global crude basket on an uncharted territory on account of war and rupee falling against dollar there is uncertainty in prices. As far as inflation in whole sale price index is concerned it was highest in fuel and power category at 31.5 % and accelerated to 9.84% in manufactured products. Moody's investor services had revised its inflation outlook for India to be 6.6% for 2022 in the emerging scenario. 

 It may be noted here that the prospects for growth are suffused with heightened uncertainty and clouded by downside risks from Geo political conflicts,with spillovers reverberating across the world. As per second advance estimate of national income released by NSO on February 28 the Indian economy is expected to achieve 8.9 % growth in 2021-22as against earlier projection of 9.2%.Components of real GDP  like private final consumption expenditure (PFCE) registered a growth of 7.0%during quarter 3 of 2021-22. With a slump in construction activities Gross Fixed Capital Formation (GFCF) moderated at 2.0% .Advance estimates of agricultural production has placed food grains output at 316.1 million tonnes.Both exports and imports maintained steady double digit growth. Moody's lowered its growth projection for India for the calendar year 2022 to 9.1% from 9.5% earlier. The headline manufacturing purchasing managers index (PMI)remained in expansionary territory for 8th consecutive month in February. Similarly February's merchandise exports surpassed the US $30 billion mark for 12 th consecutive month and target of US $400 billion for the year will be exceeded despite facing 5 challenges of Covid19, container shortage, chip shortage, commodity prices and conflict According to Commerce Minister mobility would be dependent on 7Cs - common, connected, convenient,congestion-free, charged, clean and cutting edge. Merchandise imports at US $55.4 billion in February 2022 remained above US $ 50 billion for the sixth consecutive month. Robust import demand was driven largely by higher demand for petroleum products, electronic goods and gold.  . The imports of fertilizers remained a record level in February increasing 301.6 percent.Similarly non oil non gold imports also maintained strong growth for 9th consecutive month in February 2022.Trade deficit widened to $20.9 billion in February. Total merchandise exports in the first 11months of financial year 2021-22 stood at $374.81billion as against imports worth of over $550 billion in the same period. 

 India is particularly vulnerable to high oil prices given 85% dependence on imports. Since India is a surplus producer of food grains agricultural exports will benefit in the short term from the prevailing high prices. High fuel and fertilizer prices will also adversely impact Government finances.Similarly in February 2022 domestic equity markets were embroiled by developments surrounding Russia Ukraine conflict. Foreign portfolio investors (FPI) continued to pull funds out of domestic market amidst escalating geo political tensions, increasing crude oil prices and US bond yields. Despite the ongoing geopolitical crisis and consequent uncertainty clouding GDP growth,price stability and financial stability India is making some progress in the domestic front as evidenced by on the supply side,a resilient farm sector and  retrieval in both industrial and service sectors.But spiralling oil and gas prices and unsettled financial market conditions pose downward spillover effects . Great challenges lie ahead for policy makers including the central bank and government in maintaining price stability and economic growth.In any case the weak and vulnerable sections should be provided with adequate safety nets.