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India faces a challenge in managing its fiscal deficit

India faces multiple near-term challenges like managing its fiscal deficit, sustaining economic growth, reining in inflation, and containing the current account deficit while maintaining a fair value of its currency, the finance ministry said in its monthly economic report on 20th June. "Many countries worldwide, including and especially developed countries, face similar challenges. India is relatively better placed to weather these challenges because of its financial sector stability and its vaccination success in enabling the economy to open up," the ministry stated.

India's fiscal deficit ballooned in the wake of the pandemic as revenues were nosedived while spending was boosted on health and welfare measures. While the budget gap for FY22 came in at 6.7% of the gross domestic product, lower than the revised target of 6.9%, economists expect the fiscal deficit for FY23 may exceed the target of 6.4%. Prime Minister Narendra Modi's administration has sought to boost the economy's potential growth through reforms and spending on infrastructure. However, volatile global geopolitical, economic, and financial conditions threaten growth.

India and many parts of the world are also facing the challenge of elevated inflation as crude and commodities have surged, and supply chain issues remain. "Increase in the fiscal deficit may cause the current account deficit to widen, compounding the effect of costlier imports, and weaken the value of the rupee, further aggravating external imbalances, creating the risk of a cycle of wider deficits and a weaker currency," was stated.

The ministry said that rationalizing non-Capex expenditure has become critical for protecting supportive growth Capex and avoiding fiscal slippages. Meanwhile, depreciation risk to the rupee remains as long as net foreign portfolio investor outflows continue in response to the quantitative tightening in advanced economies as they wage a prolonged battle to calm inflation.

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