On both the growth and inflation fronts, the Indian economy appears to have fared better in June when compared with the first two months of this fiscal. This is notwithstanding global uncertainty created by central bank monetary tightening and the ongoing Russia-Ukraine conflict. The Finance Ministry’s monthly economic review for June and the RBI monthly bulletin have focused on the brighter aspects of the economy, but have been realistic about the risks as well. The cautious optimism appears to be largely led by expectations of a moderation in inflation, which has been ruling at multi-decade highs in most economies. The easing of global supply chain problems along with lower demand has led to around 17 per cent decline in CRB commodity index since the first week of June, with crude oil and metals leading the decline. The rationalisation of duties on fuel and edible oils is expected to moderate price increases.

Recent macro indicators also point to resilience in the Indian economy to external upheavals. The Finance Ministry observes that “new investment projects announced by the Indian private sector improved sequentially (17.7 per cent) as well as annually (46.7 per cent) to ₹3.1 lakh crore in June 2022. The share of the Indian private sector in total investment proposals shot up to 85 per cent in Q1 of 2022-23, compared to the average of 63 per cent in the preceding four quarters.” Automobile sales are back to pre-pandemic levels and indicators of rural demand such as tractor and two-wheeler sales moved higher. The revival in southwest monsoon points towards further improvement in rural demand. While there are some pain-points -- such as downtrading in FMCGs and plateauing of e-way bill issuances, petrol collections and toll collections -- the sharp increase in government capex expenditure can act as a cushion to growth. Besides spending 70 per cent more on capex in April and May 2022, the Centre has also recently announced interest free loans amounting to ₹1 lakh crore to States.

The fiscal deficit seems more under control than the current account deficit (CAD). Recent fiscal measures such as hike in import duty on gold, the windfall tax and special excise duty on export of petroleum products and higher GST rates can create fiscal headroom. GST collections in the first quarter of FY23 registered a 36 per cent growth over last year. But the CAD, at 1.2 per cent of GDP for FY22, is expected to deteriorate sharply this fiscal. As the Finance Ministry concedes: “The (rupee) depreciation, in addition to elevated global commodity prices, has also made price-inelastic imports costlier, thereby making it further difficult to reduce the CAD.” The RBI has taken numerous measures to improve dollar inflows over the last two weeks but an appreciating dollar and rising US yields will continue to aggravate FPI pullouts and exert pressure on the rupee. The central bank will have to stand ready to intervene in forex market. But as the Finance Ministry report observes: “...these are still early days in the financial year and there are still many challenges to overcome. The Federal Reserve continues to tighten. Global liquidity conditions will tighten and asset market declines can dampen sentiment and curb spending.” The last needs to warded off: a CAD problem arising out of capital outflows impacting the real economy through trade and other channels, and widening the fiscal deficit.