India facing near-term challenges; better placed to deal with them: Finance Ministry report

21 Jun 2022 Evaluate

The finance ministry in its monthly economic review report has said that India is facing near-term challenges in managing its fiscal deficit, sustaining economic growth, reining in inflation and containing the current account deficit but the country is relatively better placed to weather these headwinds compared to other nations. It added near-term challenges need to be managed carefully without sacrificing the hard-earned macroeconomic stability. It said ‘Many countries around the world, especially developed countries, face similar challenges. India is relatively better placed to weather these challenges because of its financial sector stability and its vaccination success in enabling the economy to open up’.

As per the report, India's medium-term growth prospects remain bright as pent-up capacity expansion in the private sector is expected to drive capital formation and employment generation in the rest of this decade. Observing that the capex budget for 2022-23 is expected to underpin growth, the report said an upside risk to the budgeted level of gross fiscal deficit has emerged following cuts in excise duties on diesel and petrol. It said 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.

However, the momentum of economic activities sustained in the first two months of the current financial year augurs well for India to continue to be the quickest growing economy among major countries in 2022-23. The report also said that the world is looking at a distinct possibility of widespread stagflation, but India is at low risk of stagflation, owing to its prudent stabilisation policies. Stressing that the Indian economy in 2021-22 has indeed fully recovered the pre-pandemic real GDP level of 2019-20, it said the real GDP growth in 2021-22 stands at 8.7 per cent, 1.5 per cent higher than the real GDP of 2019-20. India's GDP in nominal terms is now Rs 236.65 lakh crore or $3.2 trillion in 2021-22 compared to the pre-pandemic nominal GDP of $2.8 trillion in 2019-20.

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