Why the Economic Survey highlighted ‘entrenched inflation’ and ‘depreciating rupee’ as risks to growth

At the same time, the Survey expressed the likelihood of plateauing export growth due to “slackening” global demand amid recessionary concerns in various advanced economies and shrinking of international trade. If the CAD — the difference between the value of goods and services imported into India and the value of those exported out of India — indeed widens further, it could put further pressure on the rupee against the US dollar, it said.

India’s current account balance recorded a deficit of $36.4 billion, or 4.4 per cent of the GDP, in July-September, against a deficit of $ 9.7 billion, or 1.3 per cent of the GDP, in the year-ago period.

While the Survey noted that the rupee has been one of the better-performing currencies globally, the modest depreciation it underwent may have added to inflationary pressures and widening of the CAD. The expectation is that there are enough tools at India’s disposal to mitigate excessive volatility in the rupee. “For FY23, India has sufficient forex reserves to finance the CAD and intervene in the forex market to manage volatility in the Indian rupee,” it said.

In the current financial year, the rupee has depreciated over 8 per cent against the US dollar. Tuesday’s closing level for the rupee was 81.92. It had touched a low of 83 in October 2022 and has recovered a bit since.

Inflation risks from global commodity prices are likely to be lower in the coming fiscal year on expectations of a slowdown in advanced economies, the Survey said, but simultaneously highlighted the upside risks to India’s projected inflation rates as well. “For instance, the re-emergence of Covid-19 in China can trigger supply chain disruptions as was the case during the pandemic period. On the other hand, if China returns to normalcy from Covid-19, there can be a surge in commodity demand–thus reversing the recent slump in commodity prices,” the Survey said.

It said the probability of a soft landing in the US economy has risen in recent months, which could keep US oil demand strong. Oil-related geopolitics could also add to India’s imported inflation going forward. “Still, overall, the inflation challenge in FY24 must be a lot less stiff than it has been this year. We expect monetary and fiscal authorities to be as proactive and vigilant as they have been this year,” the Survey said.

India’s retail inflation declined to 5.72 per cent year-on-year in December from 5.88 per cent in November, falling in the RBI’s tolerance band of 2-6 per cent for the second straight month. RBI’s inflation projection for 2022-23 stands at 6.7 per cent