Journalism of Courage
This is an archive article published on July 15, 2022
Costlier imports may pull down CAD: Finance Ministry
Strong goods and service tax revenue and the windfall tax levied on July 1 will help the Centre to meet its fiscal gap target, which had come under pressure after the cut in excise duty on petrol and diesel, along with the high capital expenditure target.
Global headwinds, however, would continue to pose a downside risk to growth as crude oil and edibles, which have driven inflation in India, remain major imported components in the consumption basket. Reuters
Costlier imports and tepid merchandise exports are expected to lead to deterioration in current account deficit (CAD) in the current financial year, according to the Finance Ministry’s monthly economic review. Global headwinds, however, would continue to pose a downside risk to growth as crude oil and edibles, which have driven inflation in India, remain major imported components in the consumption basket.
Strong goods and service tax revenue and the windfall tax levied on July 1 will help the Centre to meet its fiscal gap target, which had come under pressure after the cut in excise duty on petrol and diesel, along with the high capital expenditure target.
“If recession concerns do not lead to a sustained and meaningful reduction in the prices of food and energy commodities, then India’s CAD will deteriorate in 2022-23 on account of costlier imports and tepid exports on the merchandise account. The deterioration of CAD could, however, be moderate with an increase in service exports in which India is more globally competitive as compared to merchandise exports,” the report said.
The widening of CAD, has depreciated the Indian rupee against the US dollar by 6 per cent since January of 2022. The rupee, however, 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 of rupee, in addition to elevated global commodity prices, has also made price-inelastic imports costlier, thereby making it further difficult to reduce the CAD, it said.
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To meet the financing needs of a widening CAD and rising FPI outflows, forex reserves, in the six months since January 2022, have declined by $34 billion, it said.
India’s fiscal policy would encourage economic growth while remaining mindful of adding to inflationary pressures, as long as inflation rate based on CPI remained above the Reserve Bank of India’s medium-term target of 2-6 per cent.
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“As (retail inflation) still is at 7% in June, stabilisation policy measures will need to continue walking the tightrope of balancing inflation and growth concerns,” the ministry said.
© The Indian Express Pvt Ltd
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