Economic activity continues to show resilience in the face of headwinds in June, according to finance ministry.

Current account deficit faces high global prices menace: FinMin

India will be able to bridge its current account deficit (CAD) only if global commodity prices decline quickly, the Ministry of Finance notes in its monthly economic review for June. While recession fears across major economies has softened global commodity prices, absence of a sustained and meaningful reduction on food and energy commodities will cause CAD to widen in fiscal 2023 on account of costlier imports and tepid exports on the merchandise account.

The ministry, however, expects the projected deterioration in CAD “to moderate with an increase in service exports in which India is more globally competitive as compared to merchandise exports”.

“The widening of CAD has depreciated the Indian rupee against the U.S. dollar by 6% since January of 2022. Rupee has performed well in 2022 compared to other major economies unlike in 2013, where it depreciated against other major economies, thus reflecting strong fundamentals of the Indian economy. 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,” the ministry says in its report.

Forex reserves have declined by $34 billion in the six months since January 2022 in a bid to finance the widening CAD and rising FPI inflows. Consequently, the Reserve Bank of India has initiated measures to enhance forex inflows while ensuring overall macroeconomic and financial stability, the finance ministry says.

“These measures include exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on Incremental Foreign Currency Non-Resident (Bank) FCNR (B) and Non-Resident (External) Rupee (NRE) Term Deposits, lifting interest rate cap on these deposits, easing norms for FPI in debt market, increasing the external commercial borrowings limit under the automatic route,” it adds.

The ministry hopes the recent revenue generation measures will not only help to rein in the rise in the current account deficit but also ensure that fiscal slippage, if any, is well contained.

Also Read: Inflation at 5% by Mar ’23, stagflation more likely than recession: SBI

Global headwinds, however, continue to pose a downside risk to growth as high crude oil and edible oil prices, which drove inflation in the country, remain the major imported components in the consumption basket. Decline in their global prices and various government measures are expected to help rein in inflationary pressures, but high retail inflation continues to be a thorn in the Indian economy’s side.

“...as long as retail inflation in India continues to be higher than RBI's tolerance level of 6%, as it still is at 7% in June 2022, stabilisation policy measures will need to continue walking the tightrope of balancing inflation and growth concerns,” the monthly economic review states.

Economic activity continues to show resilience in the face of headwinds including Russia’s ongoing invasion of Ukraine, and the twin challenges of rising inflation and widening trade deficit. The economy is holding up better than expected despite the geopolitical tensions, Fed rate hike, and elevated prices of crude oil and other commodities.

Agricultural sector is benefitting from the improved geographical distribution of the south-west monsoon. Elevated international agricultural prices have enhanced the real purchasing power in the rural areas, triggering a recovery in rural demand. Some indicators are yet to recover to pre-pandemic levels, though.

Meanwhile, green shoots have appeared in the corporate sector with robust growth in net sales in the quarter ending March 2022, assisted by a general recovery in demand. A rise in operating profit margin has contributed to an increase in interest coverage ratio, indicative of improvement in credit health of most of the industries. Improved credit health is expected to facilitate the absorption of higher credit costs arising from a tighter monetary policy, the ministry avers.

Also Read: Rural India reeling under higher inflation than urban

The banking sector has retained its financial strength, inculcated by the consolidation in the second half of FY22 and RBI support measures during the Covid-19 pandemic. Even with the regulatory reliefs, banks’ capital and liquidity buffers stand, the ministry observes.

“However, as the RBI's financial stability report cautions, if the macroeconomic environment worsens to a medium or severe stress scenario, the GNPA ratio may rise above its pre-pandemic level. For the present, Scheduled Commercial Banks (SCBs) are seeing a modest return to profitability, a development that has contributed to the double-digit growth of bank credit in recent months amid an increase in working capital requirements triggered by high inflation and shift to bank borrowings on account of rising bond yields,” it adds.

The improved fundamentals of the corporate sector and a well-capitalised financial system has also bolstered investor confidence as private equity and venture capital investments rose above year-ago levels in the first two months of Q1 of 2022-23.

“Rising capex in the public sector may have also begun to crowd-in private investment as seen in preliminary data collated for Q1 of 2022-23. In this quarter, the share of the Indian private sector in total investment proposals reached a record high of 85%, rising from an average of 63% in the preceding four quarters,” the review says.

The ministry states that Centre’s sustained focus on capital expenditure may appear to clash with its decision to cut excise duty on petrol and diesel, but robust GST collection, increase in customs duties, and imposition of windfall tax are expected to boost government revenues and assist in keeping the fiscal deficit to GDP ratio unchanged from its budgeted level.

Also Read: Agri-commodity prices add to woes of consumer foods companies: Crisil

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