India’s macro risks have receded in recent weeks and concerns about the fiscal deficit target being breached may be misplaced, the Finance Ministry asserted on Thursday, while conceding that the current account deficit could, however, deteriorate this year primarily due to rising trade deficits, especially if global food and energy prices don’t cool off.
Identifying elevated inflation and a widening trade deficit as ‘twin challenges’ for the economy, the Ministry, however, emphasised that economic activity in the country remained resilient almost five months into the Russian-Ukraine conflict.
Updated trade data released separately on Thursday showed the trade deficit had widened in June to an all-time high of $26.2 billion as imports surged past $66 billion. Retail inflation moderated slightly to 7.01% in June, and the ministry attributed it to measures taken by the government and the central bank as well as fears of a global recession that dragged oil prices lower.
The government would still need to ‘continue to walk the tightrope of balancing inflation and growth concerns’ as long as price gains remain above the 6% mark, the Ministry said in its monthly economic review for June.
“Softening of global commodity prices may put a leash on inflation, but their elevated levels also need to decline quickly to reduce India’s current account deficit (CAD),” the ministry noted, stressing that the boom in gold imports was also a concern though the government had raised import duties in a bid to curb them.
“A sudden and sharp surge in gold imports amid wedding season (as many weddings were postponed to 2022 from 2021 due to pandemic-induced restrictions) is also exerting pressure on the CAD. If recession concerns do not lead to a sustained and meaningful reduction in the prices of food and energy commodities, then India’s CAD will deteriorate in 2022-23 on account of costlier imports and tepid exports on the merchandise account,” it cautioned.
The current account slid back into a deficit of 1.2% of GDP in 2021-22, after registering a surplus of 0.9% in the preceding pandemic-hit fiscal year. Economists expect the CAD to widen to about 3% of GDP this year. An increase in services exports where India is more globally competitive as compared to merchandise exports, may help rein in the CAD, which is also putting pressure on the rupee, the Ministry averred.
While the rupee has dropped 6% against the dollar since January, the Ministry contended that the currency had performed well compared with peers from other major economies ‘unlike in 2013, when it depreciated against other major economies’. This, it asserted, reflected the ‘strong fundamentals’ of the Indian economy.
However, on the flip side, the Ministry noted: “The depreciation, in addition to elevated global commodity prices, has also made price-inelastic imports costlier, thereby making it further difficult to reduce the CAD.”
While meeting the fiscal deficit target for this year may seem like a challenge following the excise duty cuts on petroleum products announced in May, the Ministry said it expected the revenue losses to be offset by robust GST collections, increase in customs duty receipts, and the imposition of the windfall tax on petroleum product exports.