Close on the heels of the remarkable V-shaped recovery of the pandemic devastated Indian economy, it is now facing a far more difficult challenge due to the ongoing Russia-Ukraine war, which is threatening to upset all possible financial predictions. As a direct fall-out of the continuing war, retail inflation has risen to a record high, while wholesale inflation has been in double digits for more than 13 weeks. On its part, the government has already taken a number of steps to keep inflation under control, such as reducing duties on petrol and diesel along with readjusting subsidies on LPG cylinders. Apart from this, the Reserve Bank of India (RBI) has hiked repo rates to control liquidity in the market. The Centre has also curtailed duties on various other items to ensure that developmental works and households are not affected due to abnormal rise in inflation rate. It has also banned exports of various food items. All these steps will reduce the revenue earned by the government to a great degree. For example, reduction of duties on petroleum products alone will cost the government Rs. One lakh crore in the ongoing fiscal. If the said amount is added with other rate cuts and loss of valuable foreign exchange due to banning of export of Wheat and Sugar, undoubtedly the figure will increase fiscal deficits manifold. As a matter of fact, the high rate of inflation combined with global uncertainty has also put a spanner on the government’s plan to fetch a sizable amount from disinvestment. At the same time, it has kept foreign investors away from the Indian market as the country’s economic growth rate will only be 1.5 per cent if adjusted with the present rate of inflation, which is not lucrative.
Though the government is hopeful that the steps taken will deliver desired results, economists are divided over the possible outcome. According to many experts, the fiscal stimuli will not work until the Russia-Ukraine war comes to an end as the pressure on prices will continue due to global supply disruptions, which will force the RBI to raise rates. They see no logic in banning the export of wheat as it earns valuable foreign currency which can be useful in importing crude oil at a higher rate, especially at a time when foreign reserve has seen an erosion of $47 billion since September 2021. They argue that the chances of inflation coming down anywhere close to comfort level in the near future are bleak and the rate is expected to stay over seven per cent for the time being. Another group of experts have expressed the opinion that it’s time to wait and watch as no one is certain about future global developments. Therefore, any attempt to revive the Indian economy will not yield desired results as the country will be equally affected as other nations due to the ongoing global scenario. In such a situation, a good monsoon can bail the Indian economy out by helping in bumper agricultural production, which will definitely ease the burden of inflation.