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June Economic Review: From inflation to current account deficit, 5 key highlights

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  The Ministry of Finance released the monthly economic review for June on Monday. The review shows that resilient domestic supply and demand fundamentals are in the first quarter of FY26.


June Economic Review: From Inflation to Current Account Deficit – 5 Key Highlights


As India navigates the complexities of a post-pandemic global economy, the month of June has brought forth a mix of encouraging signals and persistent challenges. The latest economic indicators paint a picture of resilience amid headwinds such as geopolitical tensions, fluctuating commodity prices, and domestic policy adjustments. This review delves into five pivotal highlights from June's economic landscape, drawing from official data releases, expert analyses, and market trends. These elements collectively underscore the government's efforts to balance growth with stability, while addressing inflationary pressures and external vulnerabilities. From retail inflation metrics to the widening current account deficit, these highlights offer insights into the broader trajectory of India's economy, which continues to be one of the fastest-growing major economies despite global slowdowns.

1. Inflation Dynamics: A Cooling Trend with Lingering Concerns


June witnessed a notable moderation in retail inflation, providing some relief to policymakers and consumers alike. The Consumer Price Index (CPI)-based inflation eased to 4.81% in June, down from 4.87% in May, marking the lowest level in over two years. This decline was primarily driven by a softening in food prices, particularly vegetables and pulses, which had spiked earlier due to unseasonal weather patterns and supply chain disruptions. Core inflation, which excludes volatile food and fuel components, also showed signs of stabilization, hovering around 5.1%, indicating that underlying price pressures are gradually abating.

However, this positive development comes with caveats. Fuel prices remain a wildcard, influenced by international crude oil fluctuations amid the ongoing Russia-Ukraine conflict. The Reserve Bank of India (RBI) has maintained a vigilant stance, with its Monetary Policy Committee opting to keep the repo rate unchanged at 6.5% in the latest review. This decision reflects a delicate balancing act: while inflation is within the RBI's target band of 2-6%, upside risks persist from potential monsoon deficiencies that could affect agricultural output. Economists point out that rural inflation continues to outpace urban rates, exacerbating income inequalities. For households, this means that while grocery bills might see some respite, overall cost-of-living pressures, including housing and education expenses, remain elevated. Looking ahead, the government's interventions, such as export restrictions on certain commodities and buffer stock releases, are expected to play a crucial role in keeping inflation in check. Yet, global factors like El Niño weather patterns could reverse these gains, making sustained monitoring essential for economic stability.

2. Current Account Deficit: Widening Gaps and External Pressures


One of the more concerning highlights from June is the expansion of India's current account deficit (CAD), which widened to 2.1% of GDP in the first quarter of the fiscal year, up from 1.2% in the previous quarter. This increase is largely attributed to a surge in imports, particularly of gold and electronics, outpacing export growth. Merchandise exports grew modestly by 4.5% year-on-year, driven by sectors like engineering goods and pharmaceuticals, but this was offset by a 6.8% rise in imports, fueled by higher energy costs and raw material demands.

The CAD's widening reflects broader external vulnerabilities, including a depreciating rupee, which touched a record low against the US dollar in June amid capital outflows and a strengthening greenback. Foreign portfolio investments saw net outflows of approximately $2 billion, as global investors shifted towards safer assets amid US Federal Reserve rate hikes. On a positive note, remittances from overseas Indians remained robust, clocking in at over $9 billion for the quarter, providing a buffer against trade imbalances. The government and RBI have responded with measures like liberalizing foreign exchange regulations and promoting export-oriented policies under initiatives such as the Production-Linked Incentive (PLI) scheme. Analysts forecast that the CAD could stabilize around 2-2.5% of GDP for the full fiscal year, supported by improving service exports, particularly in IT and software. Nonetheless, sustained high oil prices—Brent crude averaged around $80 per barrel in June—pose risks, potentially straining forex reserves, which stood at $593 billion, down from peaks earlier in the year. Managing this deficit will be key to maintaining macroeconomic stability and investor confidence.

3. GDP Growth Projections: Optimism Amid Revisions


June's economic review also spotlighted upward revisions in GDP growth estimates, signaling confidence in India's recovery momentum. The RBI projected a 7% growth for the fiscal year 2023-24, buoyed by strong domestic consumption and investment. This optimism stems from robust performance in manufacturing and services sectors, with the Purchasing Managers' Index (PMI) for manufacturing rising to 57.8 in June, indicating expansion. Private consumption, a key driver, has been supported by rural demand revival, thanks to better agricultural incomes and government welfare schemes like PM-KISAN.

However, challenges loom large. Industrial production growth slowed to 5.2% in May (data for June pending), affected by supply chain bottlenecks and higher input costs. Investment activity, while picking up through infrastructure projects under the National Infrastructure Pipeline, faces hurdles from elevated borrowing costs. The government's capital expenditure push, with a budgeted outlay of Rs 10 lakh crore, is expected to crowd in private investments, but delays in project execution could temper growth. International agencies like the IMF and World Bank have echoed similar sentiments, forecasting India's growth at 6.1-6.8%, outpacing global averages. Yet, downside risks from a potential global recession, particularly in key export markets like the US and Europe, could impact this trajectory. Domestically, enhancing skill development and easing regulatory burdens will be vital to sustain this growth path, ensuring it translates into job creation and inclusive development.

4. Fiscal Deficit and Public Finances: Tightening the Belt


Fiscal management emerged as another critical highlight, with the central government's fiscal deficit for the first two months of the fiscal year standing at 11.8% of the annual target, lower than the previous year's figure. This improvement is attributed to higher tax collections, particularly from Goods and Services Tax (GST), which hit a record Rs 1.61 lakh crore in June, reflecting improved compliance and economic activity. Direct tax revenues also surged, bolstered by corporate earnings and personal income taxes.

Despite these gains, expenditure pressures remain. Subsidies on food, fertilizers, and fuel continue to strain the budget, especially with global commodity volatility. The government's commitment to fiscal consolidation aims to bring the deficit down to 5.9% of GDP this year, from 6.4% last year, aligning with the glide path towards 4.5% by 2025-26. Capital spending has been prioritized, with allocations for roads, railways, and urban development, which are expected to yield long-term multipliers. However, state-level finances add complexity, as many states grapple with high debt levels and populist spending ahead of elections. Experts advocate for reforms like rationalizing subsidies and enhancing revenue buoyancy through digital taxation frameworks. Overall, prudent fiscal policy will be instrumental in maintaining sovereign credit ratings and attracting foreign investments.

5. Trade and External Sector: Balancing Act in a Volatile World


Rounding out the highlights is the trade sector, where June data revealed a narrowing merchandise trade deficit to $20.13 billion, down from $22.12 billion in May, thanks to moderated import growth. Exports in key areas like gems and jewelry, textiles, and chemicals showed resilience, benefiting from free trade agreements with countries like the UAE and Australia. The services trade surplus, driven by software exports, further cushioned the overall balance.

Yet, global uncertainties, including supply chain disruptions from China's economic slowdown and Red Sea shipping issues, pose threats. The rupee's depreciation, while aiding export competitiveness, increases import costs, particularly for oil-dependent India. Policy responses include diversifying export markets towards Africa and Latin America, and initiatives like the Atmanirbhar Bharat campaign to boost domestic manufacturing. Looking forward, integrating into global value chains through technology upgrades and sustainable practices will be crucial. The external sector's health directly influences inflation and growth, making it a linchpin for economic strategy.

In conclusion, June's economic review encapsulates a narrative of cautious optimism for India. While inflation cools and growth projections brighten, challenges like the widening CAD and fiscal pressures demand proactive measures. The interplay of domestic reforms and global dynamics will shape the coming months, with the upcoming Union Budget likely to provide further direction. As the economy strives for a V-shaped recovery, stakeholders must focus on inclusive policies to ensure broad-based benefits. This balanced approach could position India as a beacon of stability in an uncertain world. (Word count: 1,248)

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