The retail inflation, as measured by the Consumer Price Index (CPI), moved close to 7 per cent in March, a 17-month high. This came close on the heels of the RBI’s Monetary Policy Committee holding policy rates recently but crucially signaling an end to its easy money policy.

The RBI is clearly worried about the spectre of inflation and has indicated that going ahead it will prioritise inflation control over growth.

This has led to speculation over whether the RBI will raise policy rates as early as June. The CPI in March, according to the Central Statistics Office, was 6.95 per cent for March. Food and beverages, as a category, was at 7.5 per cent. But more worryingly, core inflation (inflation minus the food basket) was also high.

So, there are clearly supply issues at work here. Health expenditure has been rising and the inflation in this category is at 7 per cent. Health inflation in fact has been over 6 per cent over the last 15 months.

The prices of oils and fats increased by 18.8 per cent year-on-year, reflecting the serious supply pressures on the edible oils front.

Interestingly, the March inflation print does not fully capture the rise in fuel prices. This is because the prices were hiked only in the fourth week. So, inflation in April is most likely to breach the 7 per cent unless there is some drastic improvement on the supply side.

Falling industry output

Industrial output data, measured by the Index of Industrial Production (IIP), released on the same day as inflation data, was another pain point. IIP barely grew at 1.7 per cent in February, despite a negative base effect of 3.2 per cent in February 2021.

The top performer was infrastructure goods which grew at 9.4 per cent. But both consumer durables and consumer non-durables are stuck in the negative zone, which clearly points to the anemic consumption level in the economy.

Exports perk up

But there was some good news from the external sector. Merchandise exports in 2021-22 touched $418 billion, its highest in close to one-and-a-half decades. Service exports also turned in an impressive performance at $250 billion, its highest ever figure.

Merchandise exports exceeded the government’s target by 5 per cent. Also, the composition of exports marked an encouraging shift towards manufactured goods. Exports of electronics saw a 40 per cent jump year-on-year. Economists credit this performance to the PLI scheme.

The government finally seems to be getting ahead with signing free trade agreements after a long gap. Recently two FTAs, with the UAE and Australia, were signed giving India market access in these two countries.

More importantly, Indian trade negotiators have been shrewd enough to protect the interests of Indian dairy farmers while negotiating the FTA with Australia, an issue that has been a sticking point in the past.

But just when things were perking up on the external front came the depressing forecast from the World Trade Organisation (WTO).

The WTO has scaled down the world trade forecast for 2022 from 4.7 per cent to 3 per cent. The Russia-Ukraine war, which has reached a debilitating impasse, and the Covid lockdowns in China, are some of the factors cited by the WTO.

It had some rather depressing news on the growth front too, slashing its forecast on global growth in 2022 to 2.8 per cent from an impressive 5.7 per cent in 2021.

The sharp spurt in commodity prices are the immediate triggers, says the WTO. Russia and Ukraine are important suppliers of oil, gas, wheat, and other commodities and the war has led to serious supply disruptions in the global market.

Some opportunities

But there is also an opportunity for Indian farmers to step up grain supply to the world markets, especially wheat. This was something Prime Minister Narendra Modi indicated to US President Joe Biden in their recent meeting. The Commerce Ministry is putting in place a mechanism to increase foodgrain exports.

The Indian foodgrain stocks are overflowing. Wheat stocks alone are above 2.5 times the buffer stocks needed to supply our massive PDS requirements, so there plenty of wheat going around.

The Middle East and North African countries, traditionally big importers of wheat from Ukraine and Russia, are looking to India for supplies. A team from Egypt was in India currently to negotiate deals and in the last one month and agreements for 30-40 lakh tonnes of wheat exports have been signed with Egypt.

Just when the Omicron wave was subsiding and things were getting back to normal came the Russian invasion of Ukraine throwing things out of gear. The Indian economy now is at a strange place buffeted both by good and bad news.

Inflation in the US and Europe is at a four-decade high and there are serious risks of stagflation — high inflation combined with high unemployment and low demand.

With no end to the Russia-Ukraine war in sight, the world economy as well as India are looking at tough days ahead.