CAD will deteriorate unless global prices ease steadily: Ministry of Finance

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India’s current account (CAD) deficit will deteriorate in 2022-23 due to more expensive imports and tepid exports on the commodity account, if recession fears in the west do not lead to a lasting and significant reduction in the prices of food and energy products, the Ministry of Finance announced on Thursday. He added, however, that the deterioration in the CAD could ease with an increase in services exports, in which India is more globally competitive against goods exports.

Mainly driven by an increase in the merchandise trade deficit, the CAD stood at 1.2% of GDP in 2021-22. In addition, a sudden and sharp increase in gold imports in the middle of the wedding season (as many weddings were postponed to 2022 from 2021 due to pandemic-induced restrictions) is also putting pressure on the CAD. . To mitigate the impact, the government recently raised gold tariffs from 10.75% to 15%.

In its June economic report, the ministry said the private business sector had started to show “signs of recovery” with robust growth in net sales in the March quarter, helped by a general recovery in demand.

The increase in public investment expenditure (capex) may also have started to “attract private investment”, according to the report by the Ministry of Economic Affairs. The private sector’s share of total investment proposals hit a record high of 85% in the June quarter, after jumping an average of 63% in the previous four quarters. The Centre’s budgetary capital expenditure jumped 70% in May compared to the previous year. It pledged a record Rs 7.5 trillion capex for FY23.

The report suggests that lower global commodity prices, especially crude oil, will likely dampen inflation. However, he called for continued policy measures to stabilize price pressure “to continue walking the tightrope of balance between inflation and growth concerns.”

India’s retail price inflation declined to 7.01% in June from 7.04% the previous month and a 95-month high of 7.79% in April. However, it still remained above the upper range of the central bank’s medium-term objective (2-6%) for a sixth consecutive month.

An increase in corporate operating profit margins led to an increase in the interest coverage ratio, indicating an improvement in the credit health of most industries. “Improving credit health should make it easier to absorb higher borrowing costs resulting from tighter monetary policy,” the report said. The central bank has raised the repo rate by 90 basis points since May and is widely expected to start another round of hikes in August.

Rising global agricultural prices have boosted real purchasing power in rural areas, with agricultural terms of trade remaining positive since March 2022. have yet to return to pre-pandemic levels. “, said the ministry.

The department said the Gross Non-Performing Assets (GNPA) ratio in FY22 fell to its lowest level in six years, bolstering banks’ ability to lend. The newly acquired financial strength has not weakened, despite the withdrawal of extended support measures in the wake of the Covid outbreak, as capital and liquidity buffers have been built up well in excess of regulatory requirements. “However, as the RBI’s Financial Stability Report warns, if the macroeconomic environment deteriorates to a medium or severe stress scenario, the GNPA ratio could rise above its pre-pandemic level,” did he declare.

Robust GST collection, increased customs duties and the imposition of an exceptional tax on petroleum products should boost revenues and help the Center bring its budget deficit under control to the target level of 6.4% and also achieve the investment target, despite the reduction in fuel excise duties.

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