The budget’s investment-driven fiscal path to help the economy weather inflationary headwinds: Treasury
The budget’s investment-driven fiscal path to help the economy weather inflationary headwinds: Treasury
The investment-driven fiscal path laid out by the government in the Union Budget will help the economy weather inflationary headwinds and post real growth of almost 8% in 2022-23, the Finance Ministry said in its monthly economic report on Thursday.
The ministry’s GDP growth forecast is faster than the 7.2% pace forecast by the RBI last month.
Citing the International Monetary Fund’s forecast of 8.2%, the ministry said India will be the fastest-growing economy in 2022-23, adding that April’s “strong growth in economic activity” gave “credibility” to that forecast . This was reflected in the “robust performance of E-Way billing, ETC toll collection, electricity consumption, PMI manufacturing and PMI services” as well as record GST collection for March transactions, it claimed.
While government bond yields rose to 7.11% in April, the spread between the US 10-year Treasury yield and the Indian 10-year G-sec yield had narrowed to 421 basis points (bps) in April, from 494 Bp in February, indicating strengthening of India’s macroeconomic fundamentals, the Treasury said. One basis point corresponds to 0.01 percentage points.
‘FPI outlet pressure’
The ministry blamed “constantly declining” foreign exchange reserves due to “pressures from foreign portfolio investment (FPI) outflows in response to central banks’ monetary tightening in advanced economies.” However, the outflow volume in April was much lower than in the previous three months, it was pointed out.
India’s foreign exchange reserves, which stood at $597.7 billion on April 29, could provide about 11 months of import coverage to fund investment and consumption in the country. “FPI inflows are expected to return to positive territory as profitability rises and corporate sector balance sheets strengthen,” the ministry said.
Noting that imported inflation, particularly higher global prices for crude and cooking oil, would now significantly affect India’s inflation outlook, the ministry said government measures to keep prices of these commodities in check, along with the recent increase in the Interest rates expected by the RBI to ease inflationary pressures in the economy.
“Rising food and energy prices are a global phenomenon, and even several advanced nations have higher inflation rates than India,” she said. The RBI has signaled its determination to fight inflation with the recent 40 basis point hike in the repo rate and an increase in the cash reserve ratio for banks, which would also support macroeconomic stability and growth.
However, the inflation trend in the coming months will be more strongly influenced by the geopolitical situation, international commodity prices and supply chain management, the ministry noted.
“Global growth watchers have also factored in global monetary tightening to calm global inflation, as reflected in their slowing growth forecasts,” it said, adding that the cost of containing inflation would slow global growth.
“Failing to ease off enough global inflation despite aggressive monetary tightening severely slowing growth points to persistent supply-demand imbalances that can only be resolved through coordinated action by world leaders,” das concluded ministry.
