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NEW DELHI : As the country is staring at risks of widening of fiscal deficit, the finance ministry has said that rationalizing non-capex expenditure has become critical for avoiding fiscal slippages.

In its ‘Monthly Economic Review’ report for May, the Department of Economic Affairs (DEA) has noted that as government revenues take a hit following cuts in excise duties on diesel and petrol, an upside risk to the budgeted level of gross fiscal deficit has emerged.

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 thereby further aggravating external imbalances, creating the risk of a cycle of wider deficits and a weaker currency, it said.

“Rationalizing non-capex expenditure has thus become critical, not only for protecting growth supportive capex but also for avoiding fiscal slippage," the report added.

Non capital expenditure generally include wage expenses, subsidies among others, which exclude the spending on new development work including infrastructure, health facilities, education and others.

The concerns of fiscal slippage have cropped up amid steps by government to curb inflation including the reduction of excise duties on petrol and diesel by 8 and 6 per litre on 21 May. The finance ministry estimates a revenue loss of 1 lakh crore due to the excise duty cuts.

For the last financial year (2021-22) improved to 6.71% of the GDP over the revised budget estimate of 6.9%. The estimate for fiscal deficit in FY23 is 6.4%.

The department said that India faces near-term challenges in managing its fiscal deficit, sustaining economic growth, reining in inflation and containing the current account deficit while maintaining a fair value of the Indian currency.

It, however, observed that although many countries around the world, including developed countries, face similar challenges, India is relatively better placed to weather the challenges because of its financial sector stability and its vaccination success in enabling the economy to open up.

“Further, its medium-term growth prospects remain bright as pent-up capacity expansion in the private sector is expected to drive capital formation and employment generation in the rest of this decade. Near-term challenges need to be managed carefully without sacrificing the hard-earned macroeconomic stability," it said.

Talking of downward revision of GDP estimates, the monthly economic review said that such revisions during the course of the year will be the outcome of elevated inflation and the tightening of monetary and fiscal policies undertaken to control the inflation.

“The tightening of these stabilization policies can however address inflation only from the demand side, insofar as they are able to smother pent up demand and roll-back stimuli announced as part of the COVID-19 relief package," it said, adding that from the supply side, trade disruptions, export bans and the resulting surge in global commodity prices will continue to stoke inflation as long as Russia-Ukraine conflict persists and global supply chains remain unrepaired.

Noting that the world is looking at a distinct possibility of widespread stagflation, it said that India, however, is at low risk of stagflation, owing to its prudent stabilization policies.

The report further said that Reserve Bank of India’s (RBI) monetary policy is now fully dedicated to reining in inflation pressures in the economy. It is

raising repo rates and withdrawing excess liquidity from the banking system after inflation has remained persistently above 6% for four consecutive months.

The retail inflation for May stood at 7.04% while the wholesale price inflation for last month was at a 30 year high of 15.88%. Amid soaring inflation rate. earlier this month, the central bank increased the repo rate by 50 basis points to 4.90%.

Around the same time, government also shared the heavy lifting for inflation control by effecting duty cuts and targeting subsidies to protect the needy against the price rise, it said.

“The impact of these measures and subsequent ones, if any, on growth and inflation will manifest in the data in the coming months. However, the momentum of economic activities sustained in the first two months of the current financial year augurs well for India continuing to be the quickest growing economy among major countries in 2022-23."

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