India is facing near-term challenges in managing its fiscal deficit, sustaining economic growth, reining in inflation and containing the current account deficit but the country is relatively better placed to weather these headwinds compared to other nations, the finance ministry said in its monthly economic report.

Near-term challenges need to be managed carefully without sacrificing the hard-earned macroeconomic stability, the Monthly Economic Review said.

“Many countries around the world, 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,” it added.

India’s 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, as per the report.

Observing that the capex budget for 2022-23 is expected to underpin growth, the report said an upside risk to the budgeted level of gross fiscal deficit has emerged following cuts in excise duties on diesel and petrol.

An 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 (admittedly low at this time) of a cycle of wider deficits and a weaker currency, it said.

“Rationalising non-capex expenditure has thus become critical, not only for protecting growth supportive capex but also for avoiding fiscal slippages.

Depreciation risk to rupee, however, still remains as long as net Foreign Portfolio Investor (FPI) outflows continue in response to the increase in policy rates and quantitative tightening in advanced economies as they wage a prolonged battle to calm inflation,” it said.