The economy is well-poised to shrug off any ripple effect of global liquidity tapering in 2022-23, thanks to the country’s high foreign exchange reserves, sustained inflows of foreign direct investment (FDI) and soaring export earnings, the Economic Survey said on Monday.

External trade rebounded strongly this fiscal after a pandemic-induced slump in FY21 (exports until December jumped almost 40% from the pre-pandemic level). Foreign exchange reserves swelled over the past year and stood at a healthy $634 billion as of January 21, the fourth-highest in the world. The reserves remained well above the country’s total external debt of $593 billion (as of September 2021) and are adequate to cover as many as 15 months of imports. FDI inflows remained much above the trend level and despite a rise in the second quarter, current account deficit will be well under control in FY22 and beyond.

Nevertheless, the Survey acknowledges downside risks to the economy in the next fiscal from global liquidity tightening, continued volatility of global commodity prices, high freight costs and the fresh resurgence of Covid-19 variants.

Independent analysts have also cautioned about a flare-up in bond yields, as the Centre goes for another year of elevated borrowing programme with reduced support from the Reserve Bank of India in light of tightening measures being initiated by central banks in key economies.

With inflation hitting a 40-year high in the US, the Federal Reserve is expected to accelerate the pace of tapering its asset purchases and hike the interest rate earlier than expected in 2022. The Reserve Bank of Australia has also abandoned its yield curve target. Bank of Canada, too, has gradually tapered its asset purchases in recent months. Thus, the taper process has resumed by important central banks, stoking renewed fears of potentially destabilising spill-over impact on the emerging market and developing economies, including India.

Already, the yield on the benchmark 10-year government securities (G-secs) has topped 6% since June 3, 2021. It hit a two-year high of 6.64% on January 17 and has since been hovering around it. The Centre’s weighted average cost of borrowings in FY21 was at a 17-year low of 5.79%, supported by a low interest rate regime and central bank interventions.

Importantly, once the requirements of states are factored in, the general government gross market borrowing will likely range from Rs 22.6 lakh crore to as high as Rs 24.3 lakh crore in FY23, compared with an estimated `20.9 lakh crore this fiscal, according to Icra. SBI’s Soumya Kanti Ghosh expects it to rise to Rs 21 lakh crore in FY23 from `19.7 lakh crore for this fiscal.

However, the Survey also exuded confidence that given the strong macro-fundamentals, the economy will tide over the risks, marking a stark contrast with the state of the economy during earlier crises. For instance, while India’s retail inflation was as high as 9.1% in FY09 in the wake of the global financial crisis and 9.4% in FY13 (just before the earlier taper tantrum), it stood at 5.2% until December this fiscal. Current account deficit stood at only 0.2% of GDP, against 2.3% in FY09 and 4.8% in FY13. Of course, general government fiscal deficit is expected to rise to 10.2% of GDP in FY22, against 8.3% in FY09. But the nature and magnitude of crisis and the need for government spending to save lives and livelihood in the wake of the pandemic was much greater than any crisis before.

“India’s external sector is resilient to face any unwinding of the global liquidity arising out of the likelihood of faster normalisation of monetary policy by systemically important central banks, including the Fed, in response to elevated inflationary pressures,” the survey said.