The outlook for the Indian economy for the current financial year 2023-24 remains “bright and is solidly underpinned by strong domestic fundamentals” even as there are significant headwinds and fresh challenges from adverse geopolitical turns and volatile crude prices, the Finance Ministry said in its monthly economic review for September on Monday.
The report noted that headline inflation has eased and remained within the upper tolerance limit of the medium-term target of the Reserve Bank of India (RBI) at 5 per cent in September indicating that the increase in inflation during July-August was only temporary, caused by the seasonal and weather-driven supply constraints in a few food items.
However, the risks remain tilted to the downside to the near-term global outlook amid high inflation and tighter monetary policies, it said. “Global uncertainties have been compounded by recent developments in the Persian Gulf. Depending on how the situation develops, crude oil prices may push higher. 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. 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 said.
Both private consumption and investment demand are firming up, with additional growth levers in broad-based industrial growth and buoyant residential property markets along with improvement in industrial capacity utilisation. “Investment has hitherto been propelled mainly by the capital spending of the Union Government and the crowding-in it induced for private corporate investment. While this continues unabated, increasing demand for residential properties, supported by responsive housing loan financing, has given a fillip to construction activity and the property markets…while the Union Government’s relentless focus on capital spending has been propelling aggregate investment since FY22, there are strong indications that households’ increased propensity to invest in residential properties will drive investment further,” it said.
The ministry pointed out that the fiscal position of the Union Government remains solid with steady revenue growth, especially in direct taxes, and prudent rationalisation of revenue expenditure which has “enabled the front-loading of capital expenditure while keeping the market borrowing programme tied to the budgeted target.” Employment trends are encouraging, with improving labour force participation rate and declining unemployment rate, it said.
On the external front, there is sluggish export demand, which is expected to improve going ahead. “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.
