GDP growth to be near 8%, despite inflation worries: Finance Ministry

The capex-driven fiscal path laid out by the government in the Union Budget will help the economy weather inflationary headwinds and post almost 8% real growth in 2022-23, the Finance Ministry said in its monthly economic review on Thursday.

The ministry’s GDP growth projection is faster than the 7.2% pace forecast by the RBI last month.

Citing the International Monetary Fund’s 8.2% forecast, the ministry said that India would be the fastest growing economy in 2022-23 and added the ‘strong growth in economic activity’ in April lent ‘credence’ to this projection. This was reflected in the ‘robust performance of e-way bill generation, ETC toll collection, electricity consumption, PMI manufacturing and PMI services’ as well as record GST collection for March transactions, it asserted.

While the yields on government securities rose to 7.11% in April, the spread between the U.S. 10-year treasury yield and the Indian 10-year G-sec yield had narrowed to 421 basis points (bps) in April, from 494 bps in February, indicating a strengthening in India’s macroeconomic fundamentals, the Finance Ministry said. One basis point equals 0.01 percentage point.

‘FPI outflow pressure’

The ministry blamed the ‘steadily declining’ forex reserves due to ‘pressure from outflow of foreign portfolio investments (FPI) responding to monetary tightening by central banks in advanced economies’. However, the quantum of outflow in April was much lower than the previous three months, it pointed out.

India’s forex reserves, which stood at $597.7 billion on April 29, could provide import cover of about 11 months for financing investment and consumption in the country. “Given the rising levels of profitability and strengthening balance sheets of the corporate sector, FPI inflows are expected to return to positive territory,” the ministry said.

Noting that imported inflation, especially higher global prices for crude and edible oil would now significantly impact India’s inflation outlook, the ministry said that government measures to keep the prices of these commodities in check along with the recent increase in policy rates by the RBI were expected to temper inflationary pressures in the economy.

“Rising food and energy prices are a global phenomenon and even several advanced nations have higher inflation rates than India,” it emphasised. The RBI, it said, had signalled its determination to combat inflation with the recent 40 basis points increase in the repo rate and an increase in the Cash Reserve Ratio requirement for banks, which would also sustain macroeconomic stability and growth.

However, the inflation trajectory in the coming months would be influenced more by the geopolitical situation, international commodity prices and supply chain management, the ministry noted.

“Global growth watchers, as their slowing growth projections reflect, have also factored in monetary tightening the world over to calm down global inflation,” it said, adding that the cost of restraining inflation would be slowing global growth.

“If global inflation does not sufficiently decline despite aggressive monetary tightening sharply slowing growth, it points at the persistence of supply-demand imbalances that only coordinated actions of world leaders can resolve,” the ministry concluded.