Macro economic & financial risks to Indian economy: Emerging concerns

The Euro area sovereign debt problem is continuing to weigh on global recovery. Although slowing global growth has dampened commodity prices, heightened risk aversion and the resultant slowing of capital fl ows are likely to adversely impact emerging and developing economies (EDEs). On the domestic front, while growth has clearly decelerated, infl ation risks remain. Notwithstanding the moderation in core infl ation, the persistence of overall infl ation, in the face of signifi cant growth slowdown, points to serious supply bottlenecks and sticky infl ation expectations. The increase in current account deficit (CAD), despite the slowdown in growth, is symptomatic of demandsupply imbalances and a pointer to the need to resolve the supply bottlenecks. A widening CAD in the face of worsening global economic and fi nancial conditions and muted capital fl ows has exerted downward pressure on the rupee. Prospects for increasing capital infl ows depend on both global conditions, particularly a credible resolution of the Euro area situation, and an improvement in the domestic investment climate. Thus, key risks to domestic macroeconomic environment seem to arise from global sovereign debt problem and risk aversion domestic fiscal position, widening CAD and structural aspects of food inflation. The present study attempts to analyse the current economic situation in India in terms of various parameters