India has to remain watchful of inflationary risks and pay close attention to trends in international trade and capital flows amid global headwinds, the Union finance ministry said in a report on Thursday. The comments come a day after the International Monetary Fund (IMF) stressed that policymakers across countries would need to stay the course on monetary tightening.
The Economic Survey 2022-23 projected a baseline growth of 6.5% for 2023-24, but acknowledged that risks are more skewed to the downside than the upside.
“The geopolitical environment remains fraught. In turn, it could cause further economic dislocation through disruptions to the supply chain channels and more,” according to the ministry’s monthly economic review for January.
While the IMF has forecast 6.1% growth for India in FY24, the Reserve Bank of India (RBI) has in recent report said it is possible to push growth to 7% in the year, if the Union Budget proposals are efficiently implemented.
Inflation risks are likely to be lower for India in FY24. “Still, they will not have vanished as global conditions such as geopolitical conflicts, and consequent supply disruptions that contributed to higher inflation in 2022 are still present. Predictions of a return of El Nino conditions in the Pacific could presage a weaker monsoon in India, resulting in lower output and higher prices,” the report noted. Assuming a normal monsoon and an average price of $95/barrel for India’s basket of crude oil, the Monetary Policy Committee (MPC) of the RBI has projected inflation in FY24 to average 5.3%.
“Similarly, as with prices, external deficits may be a lesser challenge in FY24 than in FY23, but close attention to trends in international trade and capital flows will be warranted,” the ministry report said.
India’s forex reserves stood at $566 billion as on February 10, down by $40.4 billion since March 31, 2022, largely due to stronger dollar and foreign portfolio investor outflows.
The measures announced in the Union Budget FY24, such as a rise in capital expenditure, increased focus on infrastructure development, boost to the green economy, and initiatives for strengthening financial markets, etc, are expected to promote job creation and spur economic growth.
Measures announced for the MSME sector will likely reduce the cost of funds and aid small enterprises. Revision in tax slabs under the New Personal Income Tax Regime is expected to boost consumption, thus providing more impetus to economic growth.
Easier KYC norms, expansion of DigiLocker services, and overall impetus on digitisation and last-mile connectivity are predicted to strengthen financial markets.
“Thanks to the emphasis on macroeconomic stability in the last several years, the Indian economy faces the year ahead with confidence while being mindful of the risks,” it said.
Even though retail inflation rose to 6.5% in January 2023, headline inflation in India has been showing a downward trend in the second half of FY22 due to measures taken by the government and the RBI and downward-trending global commodity prices. Accordingly, the MPC has raised the policy rates by a softer 25 basis points (bps) in its February 2023 meeting, compared to higher increases earlier in the tightening cycle.