High crude oil, commodity prices unsustainable, says Finmin

‘India has braced well to cope with surge in import basket costs; Wholesale inflation to ease soon’

Terming the current price levels for as ‘unsustainable’, the Finance Ministry said on Tuesday that these prices are expected to ease soon while asserting that India is well positioned to cope with escalated import costs thanks to its record forex reserves.

The impact of the recent developments, including the Ukraine-Russia crisis, on India’s growth, inflation, current account and fiscal deficits will depend on the persistence of commodities prices at elevated levels, the ministry noted.

“Given the inherently unsustainable nature of high prices, international commodity prices are expected to level off early with increase in supplies outside the crisis zone,” the ministry projected in its monthly review of the economy for February.

The geopolitical tensions between Russia and Ukraine, the ministry said, has triggered a ‘massive turbulence in the global economy’ with prices of crude oil and other commodities shooting up and ‘escalating the cost of India’s import basket’. However, its impact on India’s activity level this month can only be assessed a month later, it said, noting that forex reserves are adequate to finance over 12 months of imports.

Geopolitical developments have introduced an element of uncertainty into the economic growth and inflation outlooks in the new financial year 2022-23, the Finance Ministry conceded. “However, the Budget with its capex orientation and prudent assumptions along with strong macroeconomic fundamentals will support growth and provides a floor to it amidst global political turmoil and likely higher volatility in financial markets,” it emphasised.

Crude oil price movements are expected to dominate the inflation trend in coming months, and the government is taking steps to mitigate adverse effects from this ‘imported inflation’ such as diversifying India’s import and energy sources beyond traditional hydrocarbons to ‘emerging fuels’ like ethanol and compressed bio-gas, the ministry said.

On the surge in Wholesale inflation, which has averaged 12.7% between April 2021 and February 2022, the ministry said a part of the observed rise is attributed to the low base in the same period of the previous year when wholesale prices recorded an inflation of just 0.7%. With the base effect fading out, the wholesale inflation rate should moderate, the ministry reasoned.