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Agencies worldwide have already projected a slowing of global economic growth, which is expected to witness headwinds with rising commodity prices, supply chain bottlenecks and faster than the projected withdrawal of monetary accommodation. India’s economy is also expected to witness slowing growth, though still higher than the other emerging market economies, said Finance Ministry on Monday.

“The World is looking at a distinct possibility of widespread stagflation. India, however, is at low risk of stagflation, owing to its prudent stabilization policies," the ministry said in its May update. 

Recent 50 basis point repo rate hike by the Reserve Bank of India (RBI) taking the repo rate to 4.9% and counteractive policy action by Government in form of excise duty cuts, rationalisation of custom duties, enhanced subsidy to targeted sections, trade policy changes and government’s continued committed to enhance capex are expected to restrain inflation while underpinning economic growth in the ongoing fiscal year, the Monthly Economic report for May 2022 said.

In the medium term, the successful launch of the Production Linked Incentive Scheme, development of renewable sources of energy while diversifying import dependence on crude oil and strengthening of financial sector are expected to drive economic growth, it added.

The high-wire balancing act between maintaining growth momentum, restraining inflation, keeping the fiscal deficit within budget and ensuring a gradual evolution of the exchange rate in line with underlying external fundamentals of the economy is the challenge for policymaking this financial year. 

“Successfully pulling it off will require prioritising macroeconomic stability over near-term growth. The reward for such a policy discipline will be the availability of adequate domestic and foreign capital to finance India’s investment needs and economic growth that fulfils the employment and quality of life aspirations of millions of Indians," the ministry added.

The economy grew 4.1% in the quarter ended 31 March, the slowest pace in a year, showed the official data released last month. For the full year, the economy expanded by 8.7%, slower than the government’s second advance estimate of 8.9%.

Economic activity was poised to rebound after the lifting of pandemic restrictions when the Russian invasion of Ukraine sent energy and commodity prices soaring, further strained global supply chains and hit business confidence. Surging inflation has since forced the central bank to raise interest rates since May.

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