india economy: Govt’s monthly economic report calls for eternal macroeconomic vigilance in these uncertain times

Emphasising that this is not the time to sit back, government’s monthly economic report called for eternal macroeconomic vigilance as the price to maintain stability and sustained growth.

It said that the US Federal Reserve’s balance sheet hasn’t started contracting yet and is expanding at a slower pace. The worry would start when the balance sheet starts shrinking as it could set off risk aversion in capital markets leading to flows being impacted.

“For all the hawkish central bank rhetoric, the balance sheet of the Federal Reserve has yet to begin contracting. It is expanding more slowly. When it actually starts shrinking, it may herald a new phase of risk aversion in capital markets, impeding global capital flows. With its bright growth prospects, India’s imports are growing faster and, therefore, financing them comfortably will have to be accorded high priority.”

It also flagged the risk of heightened geopolitical tensions around winter months as the tussle over energy could intensify in advanced nations.

“In winter months, heightened international focus on energy security in advanced nations could elevate geopolitical tensions, testing India’s astute handling of its energy needs so far.”

The report says that there is no room for complacency despite India being better placed in terms of growth and inflation compared to its peers. It outlined the upside risk to inflation due to lower Kharif sowing.

“Downside risks to growth will persist insofar as India is integrated with the rest of the world. Nor is there room for complacency on the inflation front as lower crops-sowing for the Kharif season calls for deft management of stocks of agricultural commodities and market prices without unduly jeopardising farm exports.”

India banned exports of broken rice mainly used as cattle feed while it imposed a 20% export duty on many other categories in order to better manage domestic stocks and prices. The government said that the ban on exports of broken rice has been placed to ensure that the local poultry and animal feed industry isn’t affected. Around 60-65% of input cost of animal feed comes from broken rice and the step has been taken to limit impact on poultry and dairy products.

The report says that softening energy prices along with other commodities will ease India’s inflationary concerns. Easing of supply snags globally along with resumption of Sunflower oil exports from Ukraine will help in improving the overall outlook.

“The increase in price of imported commodities not only led to uptick in headline inflation but also widened the trade balance. However, with the easing of global supply-chain disruptions and decline in commodity prices, inflationary pressures are expected to soften and trade balance is anticipated to improve.”

The international Brent crude oil prices have also moderated but a lot depends on the economic activity in China that has been racked by rolling lockdowns and the construction crisis.

“The outlook for international crude prices depends on pace of Chinese economic recovery and OPEC supply decisions. Supply chain pressures also seem to be unwinding as port congestion and other snags ease.”