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New Delhi: India’s macroeconomic outlook for FY24 is “bright” on “strong” domestic fundamentals but external risks arising due to the recent war in West Asia, further tightening of interest rates by the US and vagaries of weather could adversely impact the country’s economy, Union finance ministry said on Monday.
Citing the International Monetary Fund’s (IMF) projection earlier this month, which upgraded India’s growth outlook from 6.1% to 6.3 % for FY24 while keeping the global growth projection unchanged at 3%, the ministry in its latest monthly economic review said, “This shows the growing confidence of global analysts as well in India’s economic strength, amidst global uncertainties and fresh geopolitical challenges.”
It, however, cautioned about impending risks. “While domestic macro fundamentals are strong and improving, downside risks arise from global headwinds and uncertainties in weather conditions,” it said.
According to the report, key positive factors include strong fiscal position of the Union government, substantial reduction in inflationary pressure, strong private consumption, robust public capital expenditure leading to the crowding in of private investments, firming of industrial activities and increasing demand for residential properties.
The escalation of war in West Asia following Hamas’ terror attack in Israel on October 7 and a strong Israeli retaliation, is one of the major downside risks, according to the report. “Global uncertainties have been compounded by recent developments in the Persian Gulf. Depending on how the situation develops, crude oil prices may push higher,” the report said.
India is the world’s third largest crude oil importer and relies on imports for about 87% crude oil it processes. Prolonged war in the Gulf may spike energy prices and hit India’s fiscal position as the government may not be able to pass on the burden to people ahead of the 2024 general elections expected by May next year.
Until recently, spiralling inflation – mainly due to high food and fuel prices — was one of the key concerns of both the finance ministry and the Reserve Bank of India (RBI), prompting measures like raising cooking gas subsidy, reduction in import duties on edible oil and imposing of export restrictions on commodities such as wheat, rice and onion.
Last week, RBI governor Shaktikanta Das said “We remain extra vigilant on the evolving inflation dynamics”, even as India’s retail inflation, as measured by the Consumer Price Index (CPI), moderated sharply to 5% in September with correction in vegetable prices. “The outlook on food inflation, however, is beset with uncertainties,” the governor added.
Also Read: India’s goods exports rise in signs of trade recovery
India’s retail inflation, as measured by the Consumer Price Index (CPI), had jumped to a 15-month high to 7.44% in July from 4.87% the preceding month, with food inflation at its highest in 39 months because prices of vegetables, cereals and pulses spiked. It remained above the RBI’s upper tolerance band of 6% in August at 6.83%, before easing to 5.02% in September.
The report also flagged continued tightening of monetary policy by central banks of major economies as a dampener. “Further, the relentless supply of US Treasuries and continued restrictive monetary policy in the US (with further monetary policy tightening not ruled out) could cause financial conditions to be restrictive,” it said.
“At current levels, US stock markets have greater downside risk than upside. If the downside materialises, it will have spillover effects on other markets. Fraught geopolitical conditions can cause a general increase in global risk aversion. If these risks worsen and are sustained, they can affect economic activity in other countries, including India,” it added.
“However, India’s macroeconomic outlook for FY24 is bright and is solidly underpinned by strong domestic fundamentals. Alongside private consumption, investment demand is also firming up,” it said. There are additional growth levers in broad-based industrial growth and buoyant residential property markets. Industrial capacity utilisation has improved. An increase in household demand for residential properties combines with strong public sector capex to reinforce investment, it said.
“Kharif sowing has progressed well despite challenges. Improved reservoir levels augur well for the upcoming Rabi season. Core inflation is declining steadily, while food inflation has eased,” the report said while pointing at “significant” headwinds.
Global inflation in 2023 was estimated to decline steadily due to the tight monetary policies of central banks. But fresh challenges have cropped up in adverse geo-political turns and volatile crude prices. “Sluggish global demand is affecting India’s trade, but this is projected to recover from H2FY24. Nonetheless, with a lower trade deficit and a comfortable forex reserve position, India’s external account looks robust,” it said.
“In sum, as IMF projections also confirm, India will remain the fastest-growing major economy in the world in FY24,” it added.
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