NAME : SHRISTI DEY

COURSE: B.A. - LL.B (HONS.)

SEMESTER: IV
SECTION: 2
ROLL NUMBER: 0092
CIN NUMBER: 22-001-06-31-0092
SUBJECT: ECONOMICS (OTHER COMPONENT ASSIGNMENT)
 News Article 1:
Navigating Economic Seas: India's Inflation Dynamics and Global
Challenges
In recent years, India's economic landscape has
seen a number of dynamic shifts and difficulties.
The most recent report from the finance ministry's
monthly economic forecast for February offers a
picture of cautious optimism against a backdrop
of domestic accomplishments and global
uncertainty. This report examines the important
conclusions of the February economic outlook,
focusing on the variables impacting India's
inflation, growth trajectory, sectoral implications,
external force difficulties, etc.

-TIMES OF INDIA(TOI), MARCH 23rd, 2024

-BUSINESS STANDARD, MARCH 23rd, 2024

The question arises as to how current account deficits (CAD) affects inflation? To begin with, CAD occurs
when a country sends more money abroad than it receives. It basically means that the expenditure on
imported goods is more as compared to the amount received from the exported goods. The CAD is an
important metric as it provides insights into a country's economic health and its relationship with the rest of
the world. A persistent and large CAD can have several implications for the economy. These articles touch
upon the impact of CAD on inflation. First and foremost, a larger current account deficit over an extended
length of time may cause depreciation of rupee and increase demand for foreign money, particularly dollars.
Additionally, the country would experience inflation as a result of the depreciation of the rupee due to the
ongoing current account deficit, which will raise the cost of imported products. While existing investors will
have a stronger claim on domestic assets, new investors will start to show caution when making investments
in India. A persistent CAD means that a country is borrowing from the rest of the world to finance its
consumption and investment. This can lead to an increase in external debt levels, which may become
unsustainable if not managed effectively. High levels of external debt can pose risks to a country's financial
stability and economic growth. Although it might seem that a current account deficit would be detrimental to
the country's economy, this isn't always the case. According to economists, determining the causes of a
current account deficit and conducting a thorough analysis are key to determining if it is beneficial or
detrimental for a country. Variations in the dynamics of international trade, a significant reliance on imports,
or a weak export competitiveness could all be contributing factors to this imbalance. Reducing the CAD and
strengthening the nation's overall trade position require addressing trade imbalances. Managing the CAD
effectively is essential to stabilize the currency and control inflationary pressures.
To address a CAD and its potential negative consequences, countries often implement strategies to improve
their trade balance and reduce reliance on foreign borrowing. This may involve promoting exports,
diversifying the economy, enhancing competitiveness, and implementing policies to attract foreign
investment. The articles highlight the strategies to be adopted to improve CAD. According to the TOI
article, strong domestic economy and benign global commodity prices have contributed to lower core
inflation. Lower commodity prices could boost India's current account balance by lowering import costs.
The Business Standard article suggest that narrowing the merchandise trade deficit, coupled with rising net
services receipts, is likely to result in CAD improvement. A lower CAD can help stabilize the local currency
and reduce the cost of imports, which in turn can help ease inflationary pressures. The articles most likely
draw a connection between the stability and overall economic outlook of the nation and the CAD's
management. Sustaining economic stability, drawing in investment, and promoting sustainable growth all
depend on a well-managed currency exchange rate. The nation hopes to reduce risks, improve economic
resilience, and foster an atmosphere that is welcoming to investment and business by successfully resolving
the CAD. The articles' discussions may include tactics or actions that are being thought of, tested, or put into
practice to treat CAD. This could involve making an effort to increase trade competitiveness, decrease
reliance on imports, increase exports, draw in foreign investment, or diversify the economy. The nation
wants to improve its external trade position and lower the CAD by putting targeted policies into practice.
The articles also caution us of the “headwinds” in the future that might hamper CAD and may give rise to
inflation. According to the TOI article, inflation can rise if shipping costs continue to rise as a result of
disruptions. If export growth isn't sufficient to offset higher shipping costs, higher import prices could
worsen the current account deficit. Moreover, disruptions in global supply chains bottlenecks may affect
India's trade balance by impacting both exports and imports. The continued crisis in the Red Sea shipping
route is a cause for concern, according to the TOI report, for disruptions in grain exports from major
exporting countries. India's current account balance may be impacted by any interruptions to grain imports,
particularly if grains must be sourced from alternate, possibly more expensive markets. Earlier this week, the
RBI's State of the Economy report cautioned that the recurring incidence of short- amplitude food price
pressures is impeding a more rapid decline in headline Inflation towards the 4 per cent target. It added that
the monetary policy must remain in a risk-minimising mode. Despite headwinds like hardening crude oil
prices and global supply chain bottlenecks to trade, the report said India is looking forward to a bright out-
look for FY25. It suggested that strong growth, stable Inflation, a balanced external account, and a
progressive employment outlook would help the Indian economy close the current financial year on
a positive note.
 Focusing on the inflation dynamics of India,
India's inflation forecast shows a complex
picture of stability offset by possible threats.
The report of MoneyControl (Title - India's
FY25 economic outlook is bright, but inflation
fear stays on: Fin Min, March 22nd 2024, 04:21
IST) highlights a promising picture for the next
few months, with core inflation showing a lower
trend, indicating a general reduction of pricing
pressures. This decrease in food costs is
expected to be aided by factors including the
anticipated pick-up in summer sowing.

-MONEYCONTROL NEWS, MARCH 22ND, 2024.

Notwithstanding the optimism, inflation is subject to upside risks due to factors including rising crude oil
prices and interruptions in global supply networks. The persistent attacks on ships traversing the Red Sea are
fueling the ongoing issue, which could increase transportation
prices and affect the dynamics of inflation. The difficulties are
further exacerbated by interruptions in grain shipments from
important locations, highlighting the interdependence of world
trade and its effects on domestic inflation. This report focuses on
the Red Sea crisis and its impact on inflation touching upon
various other disruptions that might cause a rise in inflation.
The Red Sea problem has the potential to have a sectoral impact
on several industries, including agricultural, marine products,
textiles, chemicals, capital goods, and petroleum products.
Diversifying trade routes and transportation choices is deemed
crucial by the assessment, which acknowledges the necessity of
properly addressing these difficulties. Nevertheless, these
diversification initiatives can result in increased transportation
expenses, which could have an impact on how competitively priced Indian exports of goods are. Thus, in
light of changing trade dynamics, keeping an eye on the effect on the value of merchandise exports in FY25
becomes crucial.

India's GDP surpassed forecasts in the December quarter, growing at an excellent 8.4% annual rate. With a
7.6 percent growth projection, the statistics ministry expects even stronger full-year GDP growth for 2023–
2024. However, resolving important policy imperatives is necessary to achieve sustainable growth. The
articles and reports emphasize how crucial it is for domestic households to save more money in order to
finance the construction of capital in the private sector, especially considering the possible difficulties
associated with the current account deficit in FY25 as discussed above. Furthermore, aggressive steps to
strengthen trade resilience and lessen inflationary pressures are critical to maintaining India's economic
trajectory in the face of shifting global dynamics.

In conclusion, the articles provide insights into the economic challenges and opportunities facing the country
in FY25. Managing the Current Account Deficit effectively is crucial to controlling inflation and ensuring
sustainable economic growth. By implementing strategic measures to address trade imbalances and boost
exports, the country aims to navigate global economic uncertainties and maintain a positive economic
outlook.
 News Article 2:

Pandemic Fiscal Intervention and Inflation: Lessons for Policy Management

The COVID-19 pandemic brought

unprecedented challenges to
global economies, prompting
governments and central banks to
adopt aggressive policy measures
to support economic activities and
minimize the damage. As
countries now grapple with high
inflation rates, a recent study by
economists at the Reserve Bank of
India (RBI) sheds light on the
relationship between fiscal
intervention during the pandemic
and the subsequent rise in
inflation.

The pandemic's onset in early

2020 led to widespread
lockdowns and mobility
restrictions, severely impacting
output and employment across the
world. In response, governments
and central banks implemented
various policies to support
economic activities. While the
availability of vaccines at scale
helped revive economies, the
recovery was accompanied by
high global inflation, increasing
economic risks.

Initially, central banks,

particularly in advanced
economies, viewed the rising
inflation as a temporary
phenomenon stemming from
supply-chain disruptions caused
by the pandemic. However, the
Russian invasion of Ukraine in
early 2022 further exacerbated
supply-chain issues, pushing
inflation rates higher.

-BUSINESS STANDARD, MARCH 26TH, 2024.

Consequently, major central banks, including the US Federal Reserve, began aggressively raising interest
rates, leading to significant volatility in financial markets.
While supply-side disruptions were undoubtedly a factor contributing to the sharp increase in inflation rates,
the RBI study argues that the aggressive fiscal stimulus implemented during the pandemic also played a
role. The study examined the relationship between fiscal intervention and inflation in 13 countries, including
India, during the post-pandemic period.

The findings in the article reveal a stronger and more visible correlation between fiscal intervention and
inflation in the post-pandemic period. Countries that provided larger fiscal stimuli witnessed higher
increases in inflation rates, while those with moderate support experienced moderate inflation outcomes.
Advanced economies accounted for nearly 80% of the global fiscal response, primarily directed towards
direct transfers to individuals and families. This robust fiscal support enabled faster economic recovery but
also contributed to higher inflation rates.

In contrast, India's fiscal support during the pandemic was relatively limited and targeted. Although inflation
in India remained elevated during the recovery phase, the increase was not as sharp as in developed
countries, partly because India's inflation rate was already on the higher side even before the pandemic.

The report argues that in India, the fiscal deficit will be inflationary only if the economy is operating at full
employment or if there are supply bottlenecks in certain sectors. While India's core inflation rate has
moderated significantly and is close to the target, supply-side issues, particularly in the food basket, have
kept the overall inflation rate elevated.

The RBI study's findings underscore the importance of measured fiscal intervention and timely reversal to
manage inflation effectively. India's fiscal policy is currently focused on capital expenditure to support
growth. While the country needs substantial investment in infrastructure, maintaining a low and stable fiscal
deficit will help achieve the objective of sustainable growth with price stability.

The COVID-19 pandemic and the subsequent economic recovery have highlighted the intricate relationship
between fiscal policy, monetary policy, and inflation dynamics. The RBI study provides valuable insights
into this relationship, emphasizing the need for careful calibration of fiscal intervention to avoid
exacerbating inflationary pressures.

As economies worldwide continue to navigate the aftermath of the pandemic, policymakers must strike a
delicate balance between supporting growth and maintaining price stability. The lessons learned from the
pandemic fiscal intervention and its impact on inflation rates should inform future policy decisions, ensuring
a more resilient and sustainable economic recovery.
 Keypoints/Takeaways from News Article 1 & 2:
1. The finance ministry expects broad-based moderation in inflationary pressures on the back of an uptick in
summer sowing, which should result in easing food prices.
2. The narrowing merchandise trade deficit, coupled with rising net services receipts, is likely to result in an
improvement in the current account deficit (CAD) for FY25.
3. Factors supporting growth and positive inflation outlook include strong domestic demand across
manufacturing and construction activities, progressive employment outlook, and stable external account
despite geopolitical headwinds.
4. Risks to the inflation outlook include hardening crude oil prices, global supply chain bottlenecks, sustained
increases in shipping costs due to disruption, and the impact of the Russia-Ukraine conflict on global food
security.
5. The report notes improving global investor confidence and increased foreign portfolio investment inflows,
which are necessary to finance private sector capital formation in the economy.
6. India's headline inflation rate had plummeted to a near five-decade low of 5.8% in 2022-23 from 11.5% in
2020-21, assisted by easing concerns about rising household indebtedness and hardening of prices and
exchange rate.
7. The employment front showed positive results from the Periodic Labour Force Survey, with a decline in
unemployment rate and an increase in labor force participation in 2022-23.
8. The monthly report highlighted strong economic performance with improved private consumption demand,
buttressed by robust sales of passenger vehicles, durable consumer durables, and private sector capital
formation.
9. The finance ministry cautioned that the CAD needs to be watched carefully in FY25 and reiterated the need
for a balanced external account safeguarding external viability.
10. A study by RBI economists found a stronger relationship between fiscal intervention and inflation in the
post-pandemic period, with countries providing larger fiscal stimulus witnessing higher inflation increases.