The government needs to carefully manage short-term risks that the country face without sacrificing the “hard-earned macroeconomic stability”, the finance ministry said in its monthly economic report on Monday.
India faced near-term challenges in managing its fiscal deficit, sustaining economic growth, reining in inflation, and containing current account deficit while maintaining a fair value of rupee, the report said. Despite all the challenges posed by external factors, the country is still at a lower risk of stagflation, it noted.
The report made a strong case for rationalisation of non-capex spending to prevent any fiscal slippage.
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, it said. “Many countries around the world, especially developed countries, face similar challenges. India is relatively better placed to weather these challenges because of its financial sector stability and its vaccination success in enabling the economy to open up,” the report said.While external challenges will keep on stoking inflation, which will persist as long as the Russia-Ukraine conflict persists, India is better placed than its global peers, and the recent measures taken by the Reserve Bank of India and the government will manifest in coming months, it said.While external challenges will keep on stoking inflation, which will persist as long as the Russia-Ukraine conflict persists, India is better placed than its global peers, and the recent measures taken by the Reserve Bank of India and the government will manifest in coming months, it said.The report said headwinds from monetary tightening, seen globally, are a concern.
“Depreciation risk to rupee, however, still 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,” it said
Pruning non-capex spending
The finance ministry report stressed on cutting non-essential spending in the government.
The capex budget for 2022-23 is expected to underpin growth, it said, adding that an upside risk to the budgeted level of gross fiscal deficit has emerged following cuts in excise duties on diesel and petrol. Last month, the government had slashed excise duty on petrol and diesel by Rs 8 per litre and Rs 6 a litre, respectively, to tame price rise. “Rationalising non-capex expenditure has thus become critical, not only for protecting growth supportive capex but also for avoiding fiscal slippages,” the report said.
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 risk (admittedly low at this time) of a cycle of wider deficits and a weaker currency, it said.
Growth prospects
Citing various parameters, the report said the momentum of economic activities sustained in the first two months of the current financial year augured well for India that remains the quickest growing economy among major countries in 2022-23. This is despite the country being vulnerable to headwinds with rising commodity prices, supply chain bottlenecks, and faster than the projected withdrawal of monetary accommodation.
Source-https://economictimes.indiatimes.com/industry/banking/finance/short-term-risk-management-must-not-hurt-macro-stability/articleshow/92346096.cms