The Indian economy is expected to witness slowing growth and faces challenges in managing its fiscal deficit and reining in inflation, the finance ministry said on Monday in its Monthly Economic Review for May 2022.

However, the ministry said many countries, especially the developed ones, face similar challenges. India, the report said, is “relatively better placed to weather these challenges because of its financial sector stability and its vaccination success in enabling the economy to open up”.

The finance ministry added that the world is looking at a “distinct possibility” of risks of stagflation a term used to describe an economy that is witnessing stagnant growth and in which prices keep soaring. The lack of economic growth over a period of time can lead to higher unemployment.

“India, however, is at low risk of stagflation, owing to its prudent stabilisation policies,” the report stated.

The war between Russia and Ukraine has sent oil prices spiralling and raised concerns of slowing down India’s economic recovery.

“From the supply side, trade disruptions, export bans and the resulting surge in global commodity prices will continue to stoke inflation as long as Russia-Ukraine conflict persists and global supply chains remain un-repaired,” the report warned.

India’s gross domestic product grew at 8.7% in 2021-’22 as against a contraction of 6.6% during the last financial year, data showed.

The country’s retail inflation eased marginally in May to 7.04% after touching an eight-year high of 7.79% in April. However, the price rise indicator remained above the Reserve Bank of India’s tolerance band for the fifth straight month, suggesting that the central bank would continue with rate hikes in August. The RBI aims to keep retail inflation in the range of 2% to 6%.

“Going forward, global growth is expected to witness headwinds with rising commodity prices, supply chain bottlenecks and faster than the projected withdrawal of monetary accommodation,” the finance ministry said in its report on Monday.

It added: “Various international agencies have projected a slowing of global economic growth. India’s economy is also expected to witness slowing growth, though still higher than the other emerging market economies.”

The report said that maintaining growth momentum, tackling inflation and keeping the fiscal deficit within the Budget is a challenge for policy makers this financial year.

Last month, the government had slashed excise duty on petrol by Rs 8 per litre and diesel by Rs 6 a litre to tame price rise. The Centre had also said that a subsidy of Rs 200 per gas cylinder will be given this year to more than 9 crore beneficiaries of the Pradhan Mantri Ujjwala Yojana.

“The impact of these measures and subsequent ones, if any, on growth and inflation will manifest in the data in the coming months,” the finance ministry report said. “However, the momentum of economic activities sustained in the first two months of the current financial year augurs well for India continuing to be the quickest growing economy among major countries in 2022-’23.”