The Reserve Bank of India’s Monetary Policy Committee meeting will kick off on April 6. Much has happened on the politico-economic landscape since the central bank last met and spoke. For starters, growth targets are seeing some salami-slicing of their own. On the other hand, in an almost see-saw move, inflation targets are being hiked.
American brokerage firm Morgan Stanley has cut its real gross domestic product, or GDP, growth estimate for the financial year 2022-’23 in India by 50 basis points to 7.9%. A basis point is one-hundredth of a percent. Morgan Stanley has also raised its inflation forecast to 6% – the upper end of the tolerance band for the Reserve Bank of India – and flagged stagflation risks.
Rating agency ICRA has also slashed India’s GDP forecast for the 2022-’23 financial year to 7.2% from the earlier projection of 8%. The numbers are similar for India Ratings, whose growth forecast for the 2022-’23 financial year is now down to 7%-7.2% from 7.6% earlier. Moody’s has trimmed projections for both 2022 and 2023, now pencilling in a growth forecast for 2023 at 5.4%.
Inflation remains in critical care. The Reserve Bank’s own October Report stated that a 10% increase in crude oil prices from the baseline could lead to 30 basis points higher inflation, and 20 basis points weaker growth. February’s budget was based on an average oil price of $75-$80 a barrel for the fiscal year. As things stand, the Russia- Ukraine war remains unresolved, and despite wild swings and high volatility, crude prices remain above the $100 mark.
Ambitious targets, economic woes
Two actors remain pivotal to this puzzle: Delhi and Mumbai. Emerging from the knocks and bruises of last year, confidence in growth was the one banner both the Finance Ministry and the Reserve Bank held aloft. It is clear that is now a shifting target. And it is not moving up.
The expectation is that the Reserve Bank will now lower its GDP growth to 7.5% from 7.8%. If it does not, it would be both shocking and divorced from data. I do not think the central bank governor will choose to be that sanguine.
The bigger question is, then, what of the core building blocks for this economy? What does the Reserve Bank now feel about job creation that has been in a state of perpetual shock for several years now. What about the struggling small businesses that are now dealing with an escalating input cost challenge and price rise that they are unable to, at this point, pass through in their final sales.
On inflation, it bears mentioning that as we speak, a food crisis seems imminent across the world. Rising food prices and food scarcity are now a very real threat. Research house Nomura warns that large net importers of food and energy may need to impose price controls or increased food subsidies to limit the rise in inflation.
India’s indirect exposure to the Russia-Ukraine war also comes from its fertiliser imports. Thirty percent of India’s fertiliser imports come from Russia and Belarus. Which implies that any soft landing the government will need to create for poorer households may well be at the cost of larger budget deficits.
Crude concerns
The albatross around our neck, however, remains crude. While the United States announced the largest release ever from its Strategic Petroleum Reserve, member countries of the International Energy Agency made no such commitment on volumes. OPEC+, which includes the Organization of the Petroleum Exporting Countries and allies including Russia, has for the moment stuck with plans to increase output to 432,000 barrels per day, by May despite Western pressure to add more.
This means oil may well remain at highly elevated levels for some time now, building an ever-growing hole in India’s deficit. The Centre’s fiscal deficit, or gap between expenditure and revenue, at the end of February stood at 82.7% of the full year budget target, in money terms, Rs 13.16 trillion.
Contrast this with the last financial year where the fiscal deficit was 76% of the Revised Estimate of 2020-’21. In the Budget speech, the finance minister indicated that the government expects the fiscal deficit to be at 6.9% of the GDP, or Rs 15.91 trillion. That target seems uncomfortably close already.
Oil runs through our veins, in a sense. It is not just the cost stress felt when we fill our cars and two-wheelers with petrol or diesel. Consistently high crude prices create a sustained and generalised increase in the prices of each and every item that accounts for goods and services in an economy.
All this makes the Reserve Bank’s commentary on price rise quite important. Do they acknowledge the escalating inflation risks that are being warned of by economists? And if yes, will they file that away as a supply shock issue or take a more serious note of the situation, as central banks around the world find themselves doing. The last consumer price index inflation projection by the Monetary Policy Committee for the financial 2022-’23 was at 4.5%: ambitious even before the Ukraine crisis took over, and certainly a far stretch now. All eyes are then on the central bank’s next communiqué.
Russian oil imports
Up in the simmering heat of North India, different conundrums are emerging. In a recent interview, Finance Minister Nirmala Sitharaman defended her decision to purchase oil from Russia and said at an industry event, “I would put my energy security first. If the fuel is available at a discount, why shouldn’t I buy it?” This is a marked turn from her comments last month when she said a “whole lot of factors” will decide on the import of Russian oil to India.
To be fair, India’s attempt to diversify its import sources will reduce the financial burden on the government and bring down the risk of a high import bill. Cheaper crude may also bring down the current cost of production and help cool off inflationary pressures.
But it is not such a simple switch. The Indian import basket is a blend of crude predominated by supply from West Asia. For perspective – in 2021, India purchased 12 million barrels of crude oil from Russia. That’s only 2% of India’s total imports, less than even the country’s domestic production.
Imports from West Asia make up a lion’s share of 52.7% of India’s import basket. Africa and the United States are the other big batters making up 15% and 14% of India’s oil imports.
Can India suddenly pivot to buying a much larger volume of its imports from Russia? What are the consequences for Indian refiners who will need to bear the cost of recalibrating processes to newer grades of crude, extra freight and hefty conflict insurance, thanks to a bigger risk premium? For India, what is the destination and the path of the country’s strategic imperatives at this point and what longer term goals are set out while pursuing short term Band-Aids via cheaper oil purchases?
As GlobalData also points out, in order to make those oil purchases from Russia, both India and Moscow are exploring the possibility of using China’s currency yuan as a reference currency to value the rupee-rouble trade mechanism, which would facilitate a two-way trade. In essence, reducing the dependence on dollar -denominated purchases.
During Chinese Foreign Minister Wang Yi’s visit to India in March, Beijing proposed an “India-China Civilization Dialogue” to be held in both countries and an India-China Trade and Investment Cooperation Forum. More financial dependence on China, anyone?
Diplomatic tightrope
India finds itself in a unique strategic dilemma. The last fortnight saw visits by the foreign ministers of China, Britain, Russia, Mexico, Greece, Oman and Austria, a senior adviser to the German chancellor, an American Undersecretary of State and the Deputy National Security Adviser. Of them all, Prime Minister Modi chose to meet only with Russian foreign minister Sergey Lavrov. What is the message India wishes to give out in the midst of the Russia-Ukraine crisis?
India is also of course part of the Quad, an ambitious yet informal Indo-Pacific grouping that constitutes America, Australia, India and Japan. The partnership covers many bases, but in essence is seen as a strong combine to take on China’s might. Do warm meetings and conversations with Russia indicate that India is trying to establish its independent line of thought by poking the West in the eye? If the answer to that is yes, have we chosen wisely ?
Delhi could well be in a sweet-spot at this point, being wooed by numerous nations, all of whom are displaying patience with the government’s chosen stance of staying on the fence. What happens when patience runs out, pushing India to choose between taking a principled stand (that speaks out against violation of national boundaries) vs a tactical stand, where near-term economic benefits nudge it closer to countries like Russia.
Will this vote abstain stance mean that India may not receive the degree of support and sympathy it would expect if there were to be a territorial ingression on its own borders? Pakistan’s political situation is in flux, China is unapologetic about its past incursions. Territorial threats do not seem such an unimaginable outcome for us.
What path will the Reserve Bank governor choose? What path will India’s prime minister choose?
A Study in Scarlet, written by Arthur Conan Doyle in 1887, marked the first ever appearance of Sherlock Holmes and Dr Watson. “What you do in this world is a matter of no consequence,” said Holmes. “The question is what can you make people believe you have done.”
Mitali Mukherjee is a journalist, TEDx speaker and Chevening Fellow who lives in Delhi.