FinMin sept report: ‘Energy prices a concern but economy on strong footing’

“If so, inflation may yet see a resurgence rather than a decline in 2023,” the department of economic affairs said in its report for September, as it cautioned against any premature celebration. Retail inflation in September hit a five-month high of 7.41%.

Nevertheless, it asserted that growth and stability concerns for India are less than that of the world at large halfway into FY23 and the country’s medium-term growth rate is likely higher than 6%. According to the International Monetary Fund, India’s real growth could be 6.8% in FY23 and 6.1% in FY24, way above the G-20 levels.

“A long-awaited domestic investment cycle that had started will accelerate once current external shocks – geopolitical conflicts and monetary tightening – fade. Corporate and bank balance sheets in India are ready for it,” the ministry said in the report. “Further, recent developments elsewhere in the region further bolster the relative attractiveness of India as an investment destination.”

Economic activity, as measured by the PMI composite index, was higher for India at 56.7 in the first half of this fiscal, way above the global level of 51. Retail inflation for India in the first half of FY23 stood at 7.2%, lower than the world inflation of 8%, as represented by the median inflation of major economies, the report said.

Similarly, the rupee weakened by 5.4% against the greenback during this period, much lower than the depreciation of 8.9% of six major currencies in the dollar index.

The government’s thrust on the productive capital expenditure remained uninterrupted this fiscal, as capex until August was 46.8% higher than a year earlier. The ratio of revenue expenditure to capital outlay, in fact, dropped to 4.5 from 6.4 in the last year, reflecting an improvement in the quality of spending, according to the report.

Rising capital expenditure of the Centre also induced capital formation in the private sector, mirrored in the “robust performance” of the manufacturing industry in the last six months, the report added. Business sentiment also rose as input cost inflation fell to a 23-months low on the back of declining prices of industrial metals, leading to an increase in profits of the private corporate sector, it said.

However, the report flagged upside risks to inflation, the trajectory of which remains dependent on geopolitical factors. “Even though commodity prices have softened as recessionary risks continue to rise in the advanced economies, elevated imported inflation is expected to be an upside risk with the outlook for crude oil remaining uncertain and significantly tethered to geopolitical conditions,” it said.

The risk is further amplified by an appreciating dollar. Moreover, adverse climatic conditions pose a threat to the outlook on food inflation. Core inflation continues to remain sticky at 6% in September and its trajectory will depend on the extent of pending pass-through of rising input costs to the final consumer, the report said.