Sustained price spike poses risk to growth estimates: MoF

The Russia-Ukraine conflict can adversely affect fertiliser availability in India, even as situation till February-end was comfortable, the Finance Ministry said, in its Monthly Economic Report for February released on Tuesday. Oil price movement in the coming months will dominate the inflation trend, and the recent spikes in prices, if sustained, will post downward risks to growth estimates, it said.

The Ministry, however, projected that the international commodity prices are expected to “level off” early with increase in supplies outside the crisis zone, especially given the inherently unsustainable nature of the recent spike in prices. From a peak of around $139 per barrel recorded just last week, international Brent oil futures fell below $100 per barrel in early trades on Tuesday — reflecting that the inherent volatility in prices remains high.

As India’s dependence on imported fertilisers is quite high and muriate of potash (MOP) is a nutrient that is fully imported, high global prices will have a direct impact. “Fertilizer is a critical input to sowing and harvesting. As on 24th February 2022, the fertiliser availability is in a comfortable position. However, the ongoing geopolitical tensions can have an adverse impact on fertiliser availability as India is highly dependent on Russia and Belarus for fertiliser/raw material imports,” the ministry report said.

Russia and Belarus are the world’s No. 2 and No. 3 producers of MOP fertiliser, at 13.8 mt and 12.2 mt in 2020, respectively. Out of the total 5.09 mt that was imported in India in 2020-21, nearly a third came from Belarus (0.92 mt) and Russia (0.71 mt). International prices of other fertilisers (urea, di-ammonium phosphate and complexes) and their raw materials/intermediates, have also gone up sharply in recent weeks.

The report noted that rabi acreage has also not been impacted by tractor sales in 2021-22 (April-February) being 5.5 per cent lower over the corresponding period last year signalling sufficient supply of tractors.

Volatility in global commodity prices are yet to impact the growth assessment.

“Its impact on India’s activity level in March, if any, can be assessed only a month later, when high frequency data becomes available. However, with the activity levels in February not dampening, it is unlikely that actual GDP prints of 2021-22 will be different from the levels indicated in the second advance estimates. The geo-political crisis is still evolving and these are early days to make a plausible forecast of its impact on India’s economy in the year ahead,” the report said.

“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. However, the impact on growth, inflation, current account and fiscal deficits will depend on the persistence of commodities prices at elevated levels,” it said.

Consumer Price Index-based inflation or retail inflation for the month of February 2022 rose to 6.07 per cent from 6 per cent in January 2022. However, for April-February period as a whole, retail inflation averaged 5.4 per cent, during 2021-22 (AprilFebruary), around 80 basis points lower than 6.2 per cent obtained in the corresponding period of last year, it said.

Wholesale Price Index (WPI) based inflation, after remaining benign at 0.7 per cent during the April-February period of 2020-21, saw a sharp uptick in the corresponding period of 2021-22 to 12.7 per cent. “A part of the observed rise in wholesale inflation in 2021-22 (April-February) is attributed to the low base in the previous year. As the base effect fades, WPI inflation is expected to moderate, being limited to sequential growth of the index,” the report said. It is imperative to monitor the effects of this imported inflation and its multi-round effects on the domestic value chain, it said.

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