Global recession fears may ease inflationary pressures: Govt report

With global prices set to soften due to fears of a recession, the pressures caused by inflation in the Indian economy may weaken as well, the finance ministry’s economic division said in its monthly economic report for June.

The report said that most local indicators were proving to be resilient in the face of the global macroeconomic upheaval, and that the healthy goods and services tax (GST) collections and the new windfall tax would reduce the pressure on the budget deficit this year.

“If recession concerns do not lead to a sustained and meaningful reduction in the prices of food and energy commodities, India's current account deficit (CAD) will deteriorate in 2022-23 on account of costlier imports and tepid exports on the merchandise account,” it said, adding that while the rupee had depreciated against the dollar, it had performed better than other currencies.

The review released by the ministry also said that global headwinds would continue to pose a downside risk to growth ‘as crude oil and edible oils, which have driven inflation in India, remain the major imported components in the consumption basket.’

“At the moment, their global prices have eased as recession fears have dampened prices. This would weaken inflationary pressures in India and rein in inflation,” the report said. 

It, however, added that as long as the headline retail inflation continued to be above the Monetary Policy Committee’s (MPC) medium-term target upper limit of 6 per cent, policy measures would need to continue, walking the tightrope of balancing inflation and growth concerns.

Consumer Price Index-based inflation (CPI) for June came in at 7.01 per cent, the sixth straight month of headline inflation being above the MPC’s target of 4 (+/-2) per cent, thus signalling further rate hikes by the Reserve Bank of India (RBI).

“Almost five months into the Russian-Ukraine conflict, economic activity in India continues to show resilience despite dealing with the twin challenges of inflation and widening trade deficit,” the report stated. It said that agriculture and manufacturing sectors were picking up momentum, the financial sector was in good health and private sector investment was coming back in.

investment proposals hit a record 85 per cent in the April-June quarter, rising from an average 63 per cent in the preceding four quarters. According to the report, the share of the Indian private sector in total.

The report stated that the Centre’s sustained focus on capital expenditure may appear to pose a challenge to maintaining the budgeted fiscal deficit to gross domestic product (GDP) ratio, particularly when union excise collections during April-May 2022 declined, following a cut in excise duty on petrol and diesel.

“However, robust GST collections, 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,” it said. The FY23 fiscal deficit target is 6.4 per cent of GDP.

In the last six weeks, at the margin, thanks to several measures taken by the Centre and the RBI, including rate hikes, and due to global recession fears that have caused oil prices to decline, India’s macro risks have receded, the report said, adding that prices of industrial metals were lowest in sixteen months and some food items had also come down from their peaks.

“These are early days in the financial year and there are many challenges to overcome. The Federal Reserve continues to tighten. Global liquidity conditions will tighten and asset market declines can dampen sentiment and curb spending. Geopolitical risks, near and afar, are rife. For now, we will take the good news, at the margin, while remaining on guard and ready to tackle anticipated and present risks,” the report stated.

Key points of the report

• CAD will deteriorate if crude prices don't come down
• Private sector capex proposals up to record levels in Q1FY23
• GST collections, windfall tax will help fiscal deficit
• Inflation above MPC target biggest concern