India confronts pressing difficulties; it is better prepared to address them: FM

21 Jun 2022 , 11:52 AM

India has near-term challenges in managing its fiscal deficit, maintaining economic growth, controlling inflation, and regulating the current account deficit, but it is better positioned to withstand these headwinds than other countries, according to the finance ministry’s monthly economic report.

According to the Monthly Economic Review, near-term issues must be properly addressed without jeopardizing hard-won macroeconomic stability.

“Many countries across the world, particularly wealthy countries, are confronted with comparable issues. Because of its banking sector stability and vaccination success in enabling the economy to open up, India is in a better position to withstand current issues “It was also mentioned.

According to the research, India’s medium-term economic prospects are bright since the private sector’s pent-up capacity expansion is likely to boost capital formation and employment generation throughout the balance of this decade.

The research said that while the Capex budget for 2022-23 is projected to support growth, decreases in excise charges on diesel and gasoline have created an upside risk to the budgeted level of gross fiscal deficit.

An increase in the fiscal deficit may cause the current account deficit to widen, compounding the effect of higher import costs, and weaken the rupee’s value, aggravating external imbalances further, creating the risk (admittedly low at this time) of a cycle of larger deficits and weaker currencies, it said.

“Non-Capex rationalization has therefore become crucial, not just to safeguard growth-supporting CAPEX but also to minimize budgetary slippages. The rupee’s depreciation risk persists, however, as long as net Foreign Portfolio Investor (FPI) outflows continue in reaction to higher policy rates and quantitative tightening in advanced countries as they fight to keep inflation under control “It was said.

The primary imported components of India’s high retail inflation have been rising global crude and edible oil prices, it said, adding that the start of the summer heat wave has also contributed to the rise in local food costs.

International oil prices, however, may be tempered in the future as global development slows and the Organization of Petroleum Exporting Countries (OPEC) boosts supply, according to the report.

The RBI’s monetary policy, according to the May 2022 report, is now entirely focused on reducing inflationary pressures in the economy.

It is hiking repo rates and reducing excess liquidity from the banking sector after inflation has held over 6% for four months in a row. At the same time, it was reported that the government was sharing the burden of inflation management by enacting tariff reductions and targeted subsidies to shield the poor from rising prices.

To combat price rises, the government lowered excise tax on petrol and gasoline by Rs 8 per liter and Rs 6 per liter, respectively, last month. In addition, for 12 cylinders in a year, the government granted a Rs 200 per cylinder subsidy to Ujjwala Yojana recipients.

The impact of these and subsequent steps on GDP and inflation, if any, will be visible in the data in the following months, according to the study.