There is still a threat of inflation on the supply side, and Finmin is concerned about bigger deficits.

There have been calls for expenditure and revenue caps.
On Monday, the Government of Finance issued a warning about an increase in the twin deficits, which may potentially create the danger of a cycle of broader deficits and a weaker currency. The ministry also stated that “rationalisation” of non-capex expenditure has, as a result, become crucial. The statement was made by the ministry in the monthly Economic Review for the month of May. It said, “Near-term issues need to be addressed cautiously without jeopardising the hard-earned macroeconomic stability.”

“An increase in the fiscal deficit may cause the current account deficit to widen, compounding the effect of costlier imports, and weaken the value of the rupee, thereby further aggravating external imbalances, creating the risk (admittedly low, at this time) of a cycle of wider deficits and a weaker currency. “An increase in the fiscal deficit may cause an increase in the current account deficit, compounding the effect of costlier imports, and weakening the value of the The rationalisation of non-capital expenditures has thus become crucial, not only for preserving growth-supportive capital expenditures but also for preventing budgetary slippages, as stated in the report.

An upside risk to the anticipated level of gross fiscal deficit has surfaced as a result of cutbacks in excise charges on fuel and gasoline, according to the study, which also stated that the capex budget for 2022-23 is likely to support growth.

As long as net foreign portfolio investor (FPI) outflows persist in reaction to increases in policy rates and quantitative tightening in advanced countries, the ministry believes there is a danger that the rupee would continue to depreciate.

However, the ministry stated that these policies could only address inflation from the demand side, by smothering pent-up demand and via roll-back of stimuli announced as part of the Covid-19 relief package. This was in reference to the fact that monetary and fiscal policies were working together to stabilise the system. “From the supply side, trade disruptions, export bans, and the resulting surge in global commodity prices will continue to stoke inflation as long as the Russia-Ukraine conflict persists and global supply chains remain un-repaired,” the ministry said in an open and honest note. “From the demand side, trade disruptions, export bans, and the resulting surge in global commodity prices will continue to stoke inflation as long as the Russia-Ukraine conflict persist

The ministry did add, however, that despite the fact that the globe is “looking at a definite likelihood of widespread stagflation,” India is at a low risk of stagflation as a result of its “prudent stabilisation efforts.”

The ministry made note of the fact that high frequency indicators for the months of April and May pointed to an increase in economic activity in 2022-23, which would maintain the momentum that was gained in the fourth quarter of 2021-22. According to the report, the fact that momentum has been maintained during the first two months of the current fiscal year augurs well for the country to continue to have the fastest expanding economy among major countries in 2022 and 2023.

The government ministry said, with reference to the OBICUS Survey conducted by the RBI, that capacity utilisation in the manufacturing sector improved to 74.5 percent in the March quarter, up from 72.4 percent in the previous quarter. According to the results of a poll conducted by the Reserve Bank of India (RBI), an additional 59 percent of respondents anticipate an increase in capacity utilisation for the quarter that will conclude in June 2022.

The government reports that the industrial sector appears to have responded positively to the PLI plan, restoring 109 percent of its GVA level from before the epidemic. Manufacturing is experiencing positive growth momentum, as seen by the sector’s real gross value added (in Q4) being higher than it was in any of the three quarters that came before it.

According to the report compiled by the ministry concerning the Reserve Bank of India’s (RBI) monetary policy, “It is now completely focused to reigning in inflation pressures in the economy.”

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