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CAD to worsen unless global prices ease steadily: Finance ministry

Elevated global farm prices have boosted the real purchasing power in the rural areas, with terms of trade for agricultural commodities remaining positive since March 2022. “This has triggered a recovery in rural demand, although some indicators are yet to recover to pre-pandemic levels,” the ministry said.

CAD to worsen unless global prices ease steadily: Finance ministry
It, however, added that the deterioration of CAD could moderate with an increase in service exports, in which India is more globally competitive as compared to goods exports.

India’s current account deficit (CAD) will deteriorate in 2022-23 on account of costlier imports and tepid exports on the merchandise account, if recession concerns in the west do not lead to a sustained and meaningful reduction in the prices of food and energy commodities, the finance ministry said on Thursday. It, however, added that the deterioration of CAD could moderate with an increase in service exports, in which India is more globally competitive as compared to goods exports.

Primarily driven by an increase in the merchandise trade deficit, the CAD stood at 1.2% of GDP in 2021-22. Also, a sudden and sharp surge in gold imports amid the wedding season (as many weddings were postponed to 2022 from 2021 due to pandemic-induced restrictions) is also exerting pressure on CAD. In order to alleviate the impact, the government has recently hiked the customs duty on gold from 10.75% to 15%.

In its economic report for June, the ministry said the private corporate sector has started showing “signs of revival” with robust growth in net sales in the March quarter, aided by a general recovery in demand.

Rising public capital expenditure (capex) may have also started to “crowd-in private investment”, the report by the Department of Economic Affairs said. The share of the private sector in total investment proposals reached a record high of 85% in the June quarter, having jumped from an average of 63% in the preceding four quarters. The Centre’s own budgetary capex jumped 70% in May from a year before. It has pledged a record Rs 7.5 trillion in capex for FY23.

The report suggested that softening global commodity prices, especially of crude oil, will likely put a leash on inflation. However, it called for the continuance of policy measures to stabilise price pressure “to continue walking the tightrope of balancing inflation and growth concerns”.

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

A rise in firms’ operating profit margins has led to an increase in interest coverage ratio, indicating improvement in credit health of most of the industries. “Improved credit health is expected to facilitate the absorption of higher credit costs arising from a 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 go for another round of hike in August.

Elevated global farm prices have boosted the real purchasing power in the rural areas, with terms of trade for agricultural commodities remaining positive since March 2022. “This has triggered a recovery in rural demand, although some indicators are yet to recover to pre-pandemic levels,” the ministry said.

The ministry said the gross non-performing assets (GNPA) ratio in FY22 has dropped to its lowest level in six years, bolstering banks’ ability to lend. The newly-acquired financial strength has not weakened, despite the withdrawal of support measures extended in the wake of the Covid outbreak, as capital and liquidity buffers have been built well above regulatory requirements. “However, as the RBI’s financial stability report cautions, if the macroeconomic environment worsens to a medium or severe stress scenario, the GNPA ratio may rise above its pre-pandemic level,” it said.

Robust GST collection, increase in customs duties, and imposition of windfall tax on petroleum products are expected to boost revenues and help the Centre rein in its fiscal deficit at the targeted level of 6.4% and realise the capex goal as well, despite excise duty cut in fuel.

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