Government Sees Upside Risk To Fiscal Deficit: May Economic Review

The central government faces upside risk to its fiscal deficit target of 6.4% of gross domestic product for FY23, according to the Finance Ministry's monthly economic review. The government intends to rationalise revenue expenditure, while focusing on planned capex, to avoid fiscal slippage, it said.

A higher fiscal deficit could have a ripple effect on widening the current account deficit and weakening the rupee, the Department of Economic Affairs said in its review released on Monday. The country faces near-term challenges in managing its fiscal deficit, sustaining economic growth, reining in inflation and containing the current account deficit while maintaining a fair value of the Indian currency, the report said.

The government aims to prioritise macroeconomic stability over near-term growth, as per the report.

The government maintains that India is better positioned compared to other advanced and emerging economies. RBI's monetary tightening and the government's efforts to tackle inflation puts India at "lower risk of stagflation," it said.

The Indian economy is seeing growing at 7.2% in FY23.

While growth estimates for India have been pared given elevated inflation and higher interest rates, the government said it will prioritise capex to strengthen economic activity.

Speaking to BQ Prime last month, top officials underscored the government's commitment to stick to the capex target even if it means additional borrowings. This, after an excise duty cut led to a revenue loss of close to Rs 1 lakh crore. The report reiterates this and states that the capex budget for 2022-23 is expected to underpin economic growth. "Rationalising non-capex expenditure has thus become critical, not only for protecting growth supportive capex but also for avoiding fiscal slippages."

According to the report, retail inflation is expected to ease as food, edible oil and crude oil prices are expected to decline. Retail inflation fell from 7.79% in April to 7.04% in May, while food inflation dropped from 8.31% to 7.97%.

"The arrival of the southwest monsoon is expected to send newer crops to mandis (markets), reducing pressure on food prices. The withdrawal of the export ban on palm oil by Indonesia will likely ease the pressure on edible oils as well," the report said.

Further international crude prices may be tempered as global growth weakens and the Organisation of Petroleum Exporting Countries increases supply, it said.