India faces near-term challenges: FinMin

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India faces near-term challenges: FinMin

Ministry flags upside risks to fiscal deficit target following cuts in excise duties on diesel, petrol

Finance ministry- Monthly economic report

  • India is facing near-term challenges in managing its fiscal deficit, sustaining economic growth, reining in inflation and containing the current account deficit but the country is relatively better placed to weather these headwinds compared with other nations
  • Near-term challenges need to be managed carefully without sacrificing the hard-earned macroeconomic stability.
  • India’s medium-term growth prospects remain bright as pent-up capacity expansion in the private sector is expected to drive capital formation and employment generation in the rest of this decade.
  • Observing that the capex budget for 2022-23 was expected to underpin growth, An upside risk to the budgeted level of gross fiscal deficit had emerged following cuts in excise duties on diesel and petrol.
  • An increase in the fiscal deficit may cause the current account deficit to widen, compounding the effect of costlier imports, and weaken the value of the rupee thereby further aggravating external imbalances, creating the risk (low at this time) of a cycle of wider deficits and a weaker currency.

‘Must control spending’

  • “Rationalising non-capex expenditure has thus become critical, not only for protecting growth-supportive capex but also for avoiding fiscal slippages.
  • Depreciation risk to rupee - remains as long as net Foreign Portfolio Investor (FPI) outflows continue in response to the increase in policy rates and quantitative tightening in advanced economies as they wage a prolonged battle to calm inflation.
  • The imported components of high retail inflation in India have mainly been elevated global prices of crude and edible oil.
  • Crude prices may be tempered as global growth weakens and the OPEC nations increase supply.

Prelims Takeaway

  • Macroeconomic Fundamentals and Co-relations
  • Fiscal and CAD Deficit