Economic situation in India and the potential risks and uncertainties
The Indian economy is currently in a recovery phase after being hit hard by the COVID-19 pandemic.
The IMF has forecast that the Indian economy will grow at 7.5% in 2023.
However, there are a number of potential risks and uncertainties that could impact India's economic growth.
These include,
Rising inflation: Inflation in India has been rising in recent months, and is expected to remain high in the near term.
This could erode consumer purchasing power and dampen economic activity.
Global economic slowdown: The global economy is slowing down, and this could impact India's exports and economic growth.
Geopolitical tensions: The ongoing war in Ukraine and other geopolitical tensions are creating uncertainty in the global economy and could impact India's trade and investment.
Domestic challenges: India also faces a number of domestic challenges, such as high unemployment, poverty, and inequality.
How have experts reacted to recent events?
Economists feel a prolonged conflict in West Asia could push crude oil prices beyond India’s comfort zone.
Critical sea routes could face disruptions and spike transport and insurance costs.
The government may not pass on higher petroleum prices to consumers ahead of critical elections.
Airlines, for instance, have been hiking fares in line with aviation turbine fuel costs.
Higher fuel import bills could pose implications on the exchequer as oil marketing companies may need support for under-recoveries.
How have experts reacted to recent events? Finance Minister Nirmala Sitharaman, in her first remarks since the strife in Gaza, said it has brought concerns about fuel, food security and supply chains back to the forefront.
She flagged concerns about the impact of any disruptions on inflation in the near future.
The RBI Governor Shaktikanta Das, who chaired a monetary policy review hours before Hamas launched the first salvo in the conflict.
Is there a shift in the assessment of risks
The IMF raised its 2023-24 GDP growth estimate for India to 6.3% this month from 6.1% estimated earlier.
This is just slightly below the 6.5% GDP uptick the Finance Ministry.
RBI have penned in for this year, following last year’s 7.2% growth.
The Department of Economic Affairs (DEA) in the Finance Ministry said it was comfortable with the 6.5% hopes “with symmetric risks”.
These included steadily climbing crude oil prices and an overdue global stock market correction.
Is there a shift in the assessment of risks
The RBI, this month, also asserted that risks from the uneven monsoon, geopolitical tensions, global market volatility and economic slowdown, were “evenly balanced”.
The RBI expects GDP growth to slow to 6% in the current quarter, and further to 5.7% in January to March 2024 before picking up to 6.6% in Q1 of 2024-25.
What are domestic factors
Inflation may have subsided last month, but could creep back up.
The RBI, which expects average inflation of 5.4% through 2023-24.
Some vegetable prices have corrected, inflation in onions has shot up while for pulses and some cereals, prices are likely to stay high for a while.
The IMF and World Bank expect inflation to average even higher at 5.5% and 5.9%, respectively.
The RBI’s preferred 4% inflation mark remains elusive as do prospects of interest rate cuts.
This doesn’t bode well for a sustained rise in consumption demand that is vital to revive private investments.
A Bank of Baroda study on consumption trends shows that declined between 12% to 20% in the first five months of this year.
Rural demand which has been lagging, will be important, and may come under more pressure if some crops’ output is affected.
An economist from a rating firm said, the upcoming election season could imply some slowdown in public capex in infrastructure that revved up the economy in recent quarters.
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