The threats and global headwinds from geopolitical conditions are the near-term challenges for the Indian economy, and may remain for 6-12 months, Chief Economic Advisor V Anantha Nageswaran said in his keynote address at the FE Modern BFSI Summit today. The global situation is leading to high inflation in most countries; high global prices of commodities with significant import dependency (crude oil, edible oil, fertilisers, metals, etc); tightening of monetary policies in most countries; financial and macro instability risk (global spillovers and local risks); likely correction in stock markets; supply chain bottleneck (delays and shortage of key inputs); potential global recession with impact on export growth for India; and transition to green economy, he said.
India was hit by geopolitical conflict just when it was reemerging from two years of Covid pandemic. Nageswaran added that despite growth revisions by the IMF and World Bank, India is still the fastest growing major economy. He said that India is becoming inflation intolerant, and it is important to stabilise inflation expectations, going forward.
On the state of the banking sector, Nageswaran noted that the banking sector balance sheets are in good shape with well capitalised banks and lower bad loan ratios. Economic recovery will drive demand for credit and banks in a position to support the economic growth of the country.
Nageswaran also said that banks have good amount of liquidity in the system, and with recovery in economy, rising credit demand, chances of pick up in private capex cycle, improvement in capacity utilisation. All of this will help improve the profitability of the banking sector. Most of the global rating agencies (like Fitch, S&P) envisage further improvement in the banking system going forward. “We must accept that sustained growth rates of 7 per cent or more must be backed by correctly identifying the economic fundamentals and risk,” he said.