In its monthly economic report released today, the Ministry of Finance observed that while GDP growth forecasts of India during the current fiscal have been revised downwards, it continues to be the highest among major economies. As per the report, the ministry expects the capex budget for fiscal 2023 to support growth, while reining in inflation.

The growth momentum of the last quarter of FY22 has continued in the first quarter of FY23, as seen in several high frequency economic indicators, the ministry says, adding that the GDP estimates for FY22 establish that the Indian economy has fully regained the pre-pandemic real GDP level of 2019-20. The contact-intensive sectors are yet to recover though, it further adds.

“The recovery is driven by sustained growth in agriculture, higher investment and rise in exports. High- frequency indicators (HFIs) for the April-May period signal a strong pick-up in economic activity in 2022-23, sustaining the momentum gathered in Q4 of 2021-22,” the finance ministry report states. “Along with ensuring a sustainable growth path, the government has been focussed on keeping the fiscal deficit under balance. The fiscal deficit for 2021-22 stood at 6.7% of the GDP, lower than revised estimates of 6.9%.”

The projections by various agencies indicate headwinds for the global economy going forward with rising commodity prices, supply chain bottlenecks, and faster than projected withdrawal of monetary accommodation. India’s economy is also expected to witness slowing growth, though still higher than the other emerging market economies and highest among major countries, the ministry says.

“As forecasts of real GDP growth across economies drop at regular intervals during the course of the year, it will be the outcome of elevated inflation and the tightening of monetary and fiscal policies undertaken to rein-in inflation. The tightening of these stabilisation policies can however address inflation only from the demand side, insofar as they are able to smother pent up demand and roll-back stimuli announced as part of the Covid-19 relief package,” the report says.

“From the supply side, trade disruptions, export bans and the resulting surge in global commodity prices will continue to stoke inflation as long as Russia-Ukraine conflict persists and global supply chains remain un-repaired. The world is looking at a distinct possibility of widespread stagflation. India, however, is at low risk of stagflation, owing to its prudent stabilisation policies,” it further adds.

The capex budget for 2022-23 is expected to underpin growth, but the cuts in excise duties on diesel and petrol have led to an upward risk to the budgeted level of gross fiscal deficit.

“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 (admittedly low, at this time) of a cycle of wider deficits and a weaker currency,” finance ministry states.

“Rationalising non-capex expenditure has thus become critical, not only for protecting growth supportive capex but also for avoiding fiscal slippages. Depreciation risk to INR however still remains as long as net foreign portfolio investor (FPI) outflows continue in response to increase in policy rates and quantitative tightening in advanced economies as they wage a prolonged battle to calm inflation,” it adds.

The ministry notes that “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.”

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