New Delhi, April 25
The Finance Ministry on Tuesday underlined the lingering risk of slowdown amidst the International Monetary Fund’s forecast that elevated inflation and financial tightening will weigh on economic activity for at least three years since the armed conflict between Russia and Ukraine broke out in February 2022, even as it observed that FY23 has been strong for India’s economy despite global economic uncertainty.
The Ministry said in its monthly economic report (MER) of March 2023, that the economy is estimated to grow at 7 per cent — higher than the trend rate and growth of other major economies – which signals growing macroeconomic stability, as also reinforced by improved current account deficit, easing inflation pressure and a banking system strong enough to survive the increase in policy rates. The MER refers to the April 2023 update of the World Economic Outlook (WEO) of the IMF which projects global growth to decline from 3.4 per cent in 2022 to 2.8 per cent in 2023 and marginally improve to 3.0 per cent in 2024. The WEO, however, forecasts India to be the fastest-growing economy in FY24, the opinion being carried forward in the Economic Survey 2022-23 and RBI’s view of a real GDP growth rate of 6.5 per cent in 2023-24. The Finance Ministry expresses optimism of even more robust stability in the macroeconomic variables.
“However, we reiterate that downside risks to our official forecast of 6.5% for real GDP growth in FY24 dominate upside risks. OPEC’s surprise production cut has seen oil prices rise in April, off their lows of low-seventies per barrel in March. Further troubles in the financial sector in advanced nations can increase risk aversion in financial markets and impede capital flows,” the review highlighted.
Among other positive indicators is the RBI data showing narrowing of current account deficit to 2.2 per cent of the GDP in Q3 of FY23, compared to 3.7 per cent in Q2 and 2.7 per cent in the corresponding quarter of the previous year. The Ministry attributes this to a moderation in merchandise trade deficit caused by lower growth in imports relative to exports, a jump in net services exports propped up by a surge in IT and business services exports and a resilient inflow of remittances by Indians employed overseas that has already reached record levels for any year.
According to the review, inflationary pressures have begun to ease, with CPI inflation in March 2023 declining to a 15-month low at 5.7 per cent. A softening of food and core inflation contributed to the moderation in inflation. A drop in the prices of ‘vegetables’, ‘oil and fats’ and ‘cereal and products’ reduced food inflation from 5.9 per cent in February to 4.8 per cent in March. At the same time, core inflation dipped to a 23-month low of 5.7 per cent. With the softening of inflationary pressures, inflation expectations of households and businesses have been anchoring.
The Finance Ministry also reviews the concern among policymakers on the vulnerability of their financial system in the wake of the collapse of a few regional banks in the United States and reiterates the strength of the Indian banking system which is considerably less prone to such developments in the near-to-medium term future. While noting that such financial vulnerabilities and takeover of the crisis-hit Credit Suisse Bank by the Union Bank of Switzerland (UBS) have posed fears of a contagion effect across economies, especially in Emerging Market Economies and incidents like those are bound to happen in a rapid tightening cycle, the MER highlights an analysis of the Indian banking system which shows Indian banks seemingly well-placed to handle any stress emanating from the current tightening cycle.
The optimism rests on macro-and micro-prudential measures in recent years by RBI and the government which have culminated in the enhancement of risk absorption capacity, thereby improving the banking system’s stability, as well as on interest rate cycles that have been quite prominent in India, aligning with RBI’s financial conditions and goal to maintain financial stability and manage inflationary pressures. The exposure and attunement to regular interest rate cycles have made Indian banks well-equipped to handle the cycles. This, says the Finance Ministry, is unlike the case in Advanced Economies where long-term interest rates have been close to zero for an extended period of time. Therefore, financial participants expected the rates to remain at low levels. So, when rates went up sharply within a short time to curb inflationary pressures, vulnerabilities in the financial markets come to the fore.
These upsides notwithstanding, the Finance Ministry advises vigilance against potential risks such as El Nino conditions creating drought conditions and lowering agricultural output and elevating prices, geopolitical developments and global financial stability. All these three could affect the favourable combination of growth and inflation outcomes currently anticipated, the review cautions.
