Oct 27, 2022
DEA says India’s fiscal authorities must remain watchful amid recession
Oct 27, 2022
Even as India remains comparatively better off amidst a global recession, the country’s fiscal and monetary authorities must remain watchful, the country’s department of economic affairs has said. The globalised nature of India’s economy portends that even as inflationary pressures abate, another challenge to macroeconomic stability will rear its head in the form of external sector pressures.
On the one hand, the US’ Federal Reserve continues to be aggressive in the fight against inflation, thereby signalling further interest rate hikes, according to the DEA’s ‘Monthly Economic Review September 2022’ report. This may lower capital inflows, increase pressure on the rupee to depreciate, and make imports of essential commodities costlier. On the other hand, an unfavourable global economic outlook is bound to moderate the growth of exports, affecting the country’s trade balance.
Indian economic performance in the first half of 2022-23 has been impressive compared to the world. As measured by composite purchasing manager’s index, the economic activity level was higher for India at 56.7 compared to 51.0 for the world level during April-Sept 2022. On the external front, the rupee has performed relatively well in H1:2022-23 compared to other major economies, reflecting the strong fundamentals of the Indian economy.
The Central government’s continuous thrust on capital expenditure promotes broad-based growth by facilitating private sector capital formation. Significant pick-up in consumption has resulted in a more-than proportionate jump in GST revenues. A more robust economic recovery could allow the collections to settle at an elevated level, proving the high revenue productivity of the broad-based consumption. A well-capitalised banking system has led to an upswing in credit disbursement to the retail, industry, and services segments.
High-frequency indicators suggest a continued broadening of traction in services activity. E-way bills, in particular, point to the overall growth of inter-state wholesale and retail trade. Going forward, the pent-up demand in the services sector, combined with a strong economic outlook for India, will drive growth in the service sector. Service sector firms are positive about demand conditions, sales turnover, their hiring plans, and the overall business situation they expect in Q3:2022:23.
While wholesale inflation has significantly reduced from its peak of 16.6% in May 2022 to 10.7% in September 2022 on account of moderating commodity prices and government measures, retail inflation remains above the RBI’s upper tolerance band due to an uptick in food prices. However, food inflation is expected to moderate as the harvesting and procurement seasons progress, thereby contributing to a declining headline retail inflation in the rest of the fiscal year, added the report.
However, both the government and the central bank have shown, through these challenging two years and more, that they have what it takes to navigate the economic ship through choppy waters. Just as it appeared that the worst of the pandemic had passed, erupted the conflict in Europe, sending food and energy prices soaring and supplies scarcer. Again, the government rose to the occasion securing oil supplies and the central bank pivoted to monetary tightening to contain second-round effects.
The soaring dollar, higher interest rates, and external financing are the newer challenges. The one big strength that India has compared to other 33 countries is the strength of its balance sheet in the household, corporate, and banking sectors. The stability it imparts in these times is priceless. Therefore, the country should be able to meet these challenges and keep the economy growing steadily. Prudent macroeconomic policies that have served the country well since 2014 continue to remain essential.
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