Economic recovery strong, but inflation fears persist: Finance ministry

India has performed better than developing peers, as well as developed G-20 partners in terms of growth and managed inflation better than most nations. However, the geopolitical situation may yet deteriorate, and inflation may see a resurgence in 2023 rather than a decline, the Finance Ministry said in its latest monthly economic report (MER) on Saturday.

“Halfway into FY2022-23, growth and stability concerns for India are less than that of the world at large. As measured by PMI composite index, economic activity level was higher for India at 56.7 compared to 51.0 for the world during April-Sept 2022,” the September MER said. It added that average retail inflation for India during these six months stood at 7.2 per cent, lower than the world inflation of 8.0 per cent, as represented by the median inflation of major economies.

Even as rupee touched fresh lows against the dollar, the MER stated that the currency depreciated by 5.4 per cent against the dollar in the first six months of FY23, less than the depreciation of 8.9 per cent of six major currencies in the DXY Index.

“Increasing revenue generation has further kept the fiscal deficit until August aligned with its budgeted level, which otherwise could have gone awry with high capital expenditure, higher fertiliser and food subsidies and excise tax cuts to rein in inflation,” the MER said with regards to the centre’s balance sheet.

The MER stated that for much of April-September, the contact-based services sector had shown considerable promise to support growth by ventilating the pent-up demand. The tourism industry has made good progress, while robust growth performance has been ably supported by a well-capitalised banking system that witnessed an upswing in credit disbursement to the retail, industry and services segments.

The report stated that a long-awaited domestic investment cycle that had started would accelerate once current external shocks – geopolitical conflicts and monetary tightening – fade. After several years of development, corporate and bank balance sheets in India are ready for it, and India’s public digital infrastructure appears poised to deliver big time on financial access and formalisation for households and smaller businesses, it added.

“Global energy prices and supplies remain sources of concern. Geopolitical conflicts may intensify, reigniting supply chain pressures that have eased recently. If so, inflation may see a resurgence rather than a decline in 2023,” the MER stated.