In News:

• In its latest ‘Monthly Economic Review’, the Ministry of Finance has highlighted two key areas of concern for the Indian economy:
  • the fiscal deficit and
  • the current account deficit (or CAD).

What’s in Today’s Article

• Monthly Economic Review – About, Key highlights

Monthly Economic Review

• This report is released by the Department of Economic Affairs under the Ministry of Finance on monthly basis.
• It presents a picture about the status of Indian economy and its prospects.
• It analyses the factors affecting growth and recommends necessary actions.

Key Highlights of Monthly Economic Review

• Optimistic picture presented
  • In its latest ‘Monthly Economic Review’, the Ministry of Finance has painted an overall optimistic picture of the state of the domestic economy.
  • The World is looking at a distinct possibility of widespread stagflation.
  • India, however, is at low risk of stagflation, owing to its prudent stabilization policies
• Several factors affecting the economic growth
  • The economic growth outlook is likely to be affected by several factors owing to:
    • trade disruptions, export bans and the resulting surge in global commodity prices —all of which will continue to stoke inflation.
  • These challenges will stay as long as the Russia-Ukraine conflict persists and global supply chains remain unrepaired.
• Economic activities in India are gaining momentum
  • The report stated that the momentum of economic activities sustained in the first two months of the current financial year augurs well for India.
  • India continues to be the quickest growing economy among major countries in 2022-23.
• Two key areas of concern for the Indian economy
  • The report highlighted two key areas of concern for the Indian economy. These are:
    • the fiscal deficit and the current account deficit (or CAD).
• Observations regarding Fiscal deficit (FD)
  • The report states that an upside risk to the budgeted level of gross fiscal deficit has emerged.
    • The FD is essentially the amount of money that the government has to borrow in any year to fill the gap between its expenditures and revenues.
  • This is due to the fact that government revenues took a hit following cuts in excise duties on diesel and petrol.
  • Higher levels of fiscal deficit typically imply the government eats into the pool of investible funds in the market.
    • This amount could have been used by the private sector for its own investment needs.
    • The government is trying its best to kick-start and sustain a private sector investment cycle.
    • Hence, borrowing more than what it budgeted will be counter-productive.
• Recommendation to contain Fiscal Deficit
  • The report underscores the need to trim revenue expenditure (or the money government spends just to meet its daily needs).
  • It urged government to rationalize non-capex expenditure so as to protect growth supportive capex and also for avoiding fiscal slippages.
    • Capex or capital expenditure essentially refers to money spent towards creating productive assets such as roads, buildings, ports etc.
    • Capex has a much bigger multiplier effect on the overall GDP growth than revenue expenditure.
• Observations regarding the Current account deficit
  • The report highlighted the costlier imports such as crude oil and other commodities will widen the CAD.
    • The current account essentially refers to two specific sub-parts:
      • Import and Export of goods — this is the trade account.
      • Import and export of services — this is called the invisibles account.
    • If a country imports more goods (everything from cars to phones to machinery to food grains etc) than it exports, it is said to have a trade account deficit.
    • A deficit implies that more money is going out of the country than coming in via the trade of physical goods.
    • Similarly, the same country could be earning a surplus on the invisibles account — that is, it could be exporting more services than importing.
    • If, however, the net effect of a trade account and the invisibles account is a deficit, then it is called a current account deficit or CAD.
    • A widening CAD tends to weaken the domestic currency because a CAD implies more dollars (or foreign currencies) are being demanded than rupees.
  • The increasing CAD will also put downward pressure on the rupee.
  • A weaker rupee will, in turn, make future imports costlier.
    • There is one more reason why the rupee may weaken.
    • If, in response to higher interest rates in the western economies especially the US, foreign portfolio investors (FPI) continue to pull out money from the Indian markets.