New Delhi
The finance ministry on Thursday asserted that India’s macro risks have eased in recent weeks and concerns about a breach of the fiscal deficit target may be misplaced, however, the current account deficit this year was mainly due to the widening trade deficit. could worsen, especially if global food and energy prices do not calm down.
Identifying increased inflation and a widening trade deficit as “double challenges” to the economy, the ministry stressed that economic activity in the country remained resilient for nearly five months into the Russian-Ukraine conflict.
Updated trade data released separately on Thursday showed the trade deficit widened to an all-time high of $26.2 billion in June, as imports exceeded $66 billion. Retail inflation eased slightly to 7.01% in June, and the ministry attributed this to measures taken by the government and the central bank, as well as fears of a global slowdown that drove oil prices down.
The ministry, in its monthly economic review for June, said the government would still have to “continue to walk the test of balancing inflation and growth concerns” as long as price gains remain above 6%.
“While a moderation in global commodity prices may contain inflation, their high levels also need to be sharply reduced to bring down India’s current account deficit (CAD),” the ministry said. The government had increased the import duty to curb these.
“A sudden and sharp jump in gold imports amid the wedding season (many weddings were postponed from 2021 to 2022 due to pandemic-induced restrictions) is also adding to the pressure on the CAD. If slowdown concerns do not lead to a sustained and meaningful reduction in the prices of food and energy commodities, India’s CAD will worsen in 2022-23 on account of costly imports and exports on the trade account,” it cautioned.
After recording a surplus of 0.9% in the preceding pandemic-hit financial year, the current account slipped back into a deficit of 1.2% of GDP in 2021-22. Economists expect the CAD to rise to around 3% of GDP this year. The ministry said growth in services exports where India is more competitive globally than merchandise exports may help in containing the CAD, which is also putting pressure on the rupee.
While the rupee has depreciated 6% against the dollar since January, the ministry argued that the currency performed well in comparison to peers of other major economies ‘unlike in 2013, when it depreciated against other major economies’. was. This, it asserted, reflects the ‘strong fundamentals’ of the Indian economy.
However, on the other hand, the ministry noted: “Depreciation, in addition to increasing global commodity prices, has also made price-inefficient imports costlier, making it more difficult to reduce the CAD.”
Meeting the fiscal deficit target for this year may seem like a challenge after the excise duty cut on petroleum products announced in May, the ministry said, adding that it needs to see strong GST collections, increase in customs receipts and offset the revenue deficit. are supposed to. Imposition of windfall tax on export of petroleum products.