The Indian economy is “remarkably resilient” amid a global slowdown because of “solid” domestic demand, moderate inflation, sustained capital expenditure and continued buoyancy in revenue collections, the finance ministry said in its monthly review on Tuesday. An upbeat farm output has sustained rural demand, which will get a further boost from the winter crop output, said the Monthly Economic Review for October.
“Several indicators, such as sales of fast-moving consumer goods and two and three-wheelers, point towards improvement in rural demand,” it said.
Rising rural wages, increasing minimum support prices and prospects of healthy sowing for the winter cropping will add further strength to the rural demand, it added. Rapid progress in the procurement of wheat and rice has ensured a continuous increase in food buffers, which will aid in curbing inflationary pressures caused by uneven rainfall distribution in the country, besides strengthening food security, it said.
Industrial activity will expand as the trajectory of manufacturing activity is firm enough to withstand temporary headwinds of rising input costs and realignment of production lines with fast-paced changes in consumer preferences, the ministry said. The fall in the manufacturing Purchasing Managers’ Index (PMI) from 57.5 in September to 55.5 in October is “temporary” due to rising raw material costs. A value greater than 50 signifies expansion.
Although competitive conditions and rising cost pressures led to a moderation in services PMI services to 58.4 in October from 61 in September, it is still in an expansionary zone, it said. “Despite rising input costs, overall sentiment in the services sector remains upbeat, driven, among others, by an upswing in the tourism cum hotel industry induced by leisure travel, business travel, and social events.” The country’s “booming e-commerce industry” is “another strong pillar” of the country’s services sector, the review said.
Notwithstanding geopolitical upheavals and global headwinds due to major central banks keeping interest rates high, India will maintain its growth momentum due to the government’s sustained investment push, healthy corporate profits and a reduction in bad loans, it said. Inflation will ease moderate further as crude oil prices soften, it projected. “Recognising this, RBI (Reserve Bank of India) has also indicated that any further tightening of monetary policy will likely occur when transmission is closer to completion and if the situation warrants,” the review said.
The report, however, cautioned about inflationary pressures, particularly due to external factors. “With more than half of the current financial year witnessing positive developments in the economy, the full financial year should conclude as projected with a strong growth performance and macroeconomic stability,” it said. “Yet, risks on the downside persist. Inflation is one of them that has kept both the government and the RBI on high alert.”
Financial flows in the external sector also need monitoring as they impact the value of the rupee and the balance of payments, it said. “A fuller transmission of the monetary policy may also temper domestic demand,” it added.
India’s growth in the year to March should continue to be a “positive outlier” compared with other major economies, the review said. In the medium-term, a sustained focus on public investment in infrastructure and advances in digital public infrastructure would enable India to look forward to a longer economic and financial cycle than in the past, it said.
“A normalising base and an erratic monsoon are expected to result in a sequential moderation in the GDP [gross domestic product] growth to 7.0% in Q2 FY2024 from 7.8% in Q1 FY2024. Regardless, we anticipate that the GDP expansion in this quarter will exceed the Monetary Policy Committee’s (MPC’s) October 2023 projection of 6.5%,” Aditi Nayar, Chief Economist, Head-Research & Outreach, ICRA Ltd, said.
“Looking ahead, uneven rainfall, narrowing differentials with year-ago commodity prices, the possible slowdown in momentum of Government capex as we approach the Parliamentary Elections, weak external demand and the cumulative impact of monetary tightening are likely to translate into lower GDP growth in H2 FY2024. As a result, we maintain our FY2024 GDP growth estimate at 6.0%, lower than the MPC’s projection of 6.5% for the fiscal,” she added.
Source: The Hindustan Times