Economic Survey 2023: How India Braved The Global Inflation Storm Post-Ukraine War

The year 2022 was one of unprecedented global inflation, triggered by the Russia-Ukraine war.

While India’s economy was not as badly impacted as those in the West, it did touch 7.8 per cent in April 2022, given the high oil prices, before cooling down to 7 per cent in August and less than 6 per cent in December. 

The Reserve Bank of India (RBI), quite like its counterparts in the West, was on an interest rate hike spree.

The aim was to engineer what most central bank heads call a ‘soft landing’, that is a moderate slowdown in growth to ensure inflation is back to normal levels but without hurting the businesses. 

What was worrying the observers was a repeat of the mistakes post the oil crisis in 1979 that led to high inflation (more than 12 per cent) resulting in the Fed having to take the interest rates as high as 19 per cent in 1981.

At the risk of ushering high employment and negative growth, central banks were looking to curb inflation. 

It is also important to put in perspective the volatility in the interest rates in the West compared to India.

At the end of 2020, the interest rate was 4 per cent in India, minus 0.5 per cent in the Eurozone, 0.1 per cent in the UK, and 0.09 per cent in the US.

At the end of 2021, the interest rate was 4 per cent in India, minus 0.5 per cent in the Eurozone, 0.25 per cent in the UK, and 0.07 per cent in the US.

Now, post the inflation storm, triggered by the Russia-Ukraine war, the forecasts for 2022 and 2023 have thrown the central bank tools for a toss.

As per forecasts in early 2022, the interest rates were expected to be 6.25 per cent in India, 2 per cent in the Eurozone, 3 per cent in the UK, and 4.08 per cent in the US.

At the end of 2023, the forecasts project the interest rate in India to be around 6.25 per cent, 2.25 per cent in the Eurozone, 3.25 per cent in the UK, and 3.33 per cent in United States, clearly factoring in the relief in the crude and natural gas prices and for the war in Ukraine to cease.

However, what were the key drivers of domestic inflation. 

One, vegetables, cereals, milk, and spices. In this context, the importance of the Pradhan Mantri Garib Kalyan Anna Yojana must be acknowledged, given it has managed to shield almost two-third of the population or over 800 million people from food inflation.

The scheme, as per observers, is expected to continue until the elections next year. 

Tomato was an outlier in vegetables, when it came to inflation, courtesy of the crop damage due to unprecedented rainfall in Karnataka, Tamil Nadu, Andhra Pradesh and Telangana.

However, the price shock of April-September moderated by the end of December 2022.

Meanwhile, no such price shocks were witnessed for onions and potatoes. 

In FY23, rural inflation remained higher than urban inflation, further posing a challenge for the local governments.

While food inflation hit rural India, fuel inflation was more severe in the urban parts of the country.

By the end of 2022, however, both food and fuel inflation, for both regions, were within manageable levels. 

The government embarked on several measures to curb domestic inflation. 

Fuel Prices: The Central government intervened by calibrating the excise duties on petrol and diesel.

The first phase of reduction in terms of Rs 5 on petrol and Rs 10 on diesel was made effective from 4 November 2021 and the second phase from 22 May 2022 (Rs 8 per litre on petrol and Rs 6 per litre on diesel), as reported in the survey. 

Plastic products: The duty on import of raw materials used in the plastic industry was reduced to aid the interests of domestic manufacturing.

The duties on naphtha, propylene oxide and polymers of vinyl chloride were lowered from 2.5 per cent to 1 per cent, 5 per cent to 2.5 per cent and from 10 per cent to 7.5 per cent respectively in May 2022.  

Steel: In May 2022, import duty on major inputs — ferronickel, cooking coal, PCI coal — was cut from 2.5 per cent to zero, while the duty on coke and semi-coke was slashed from 5 per cent to zero.

Tax on export of iron ores and concentrates was increased from 30 per cent to 50 per cent, while that on iron pellets was raised to 45 per cent, as reported in the Economic Survey. 

Diamonds and gemstones: In the previous year’s budget, customs duty on cut and polished diamonds and gemstones was reduced to 5 per cent and duty on the simply sawn diamond was reduced to zero. 

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