On October 6, the Reserve Bank of India (RBI) maintained its GDP growth projection for the year at 6.5%. This outlook was based on a balance of factors. While there were risks stemming from geopolitical tensions, economic fragmentation, volatile financial markets, and an uneven monsoon, these were offset by the strengthening domestic demand.
Do you think that fresh global turmoil could cloud the economic outlook of India for rest of 2023-24? Support your argument with relevant illustrations. (15 marks, 250 words).
Relevance of the growth projection now
- In the weeks following this statement, new uncertainties have arisen. The Israel-Hamas conflict, which started just after the monetary policy review, has escalated, and concerns have been raised about its implications for global food, fuel, and fertilizer supplies, which could affect India’s macroeconomic framework.
- Additionally, rising U.S. bond yields, mixed data, and signals from central banks around the world have introduced further uncertainties. This unease was reflected in a significant stock market sell-off in India during the week.
- While the RBI’s outlook for growth was previously described as “evenly balanced,” there is no guarantee that this perspective will remain the same.
Stance of the government on the above uncertainties
- The Finance Ministry, despite acknowledging global uncertainties, appears to be relatively optimistic about the country’s economic outlook for the time being.
- In its monthly economic report published on Monday, it affirms that economic growth is still progressing as planned.
- Inflation is subsiding following a temporary surge in July and August, and there is a strengthening in both consumption and investment demand.
- Addressing concerns about the imminent rise in crude oil prices, it points out that prices in the July to September quarter are considerably lower than the averages of $109.5 and $97.9 in the first and second quarters of the 2022-23 fiscal year.
- The unfavorable foreign trade situation is expected to improve, and there are optimistic prospects for job creation in the industrial sector over the next two quarters.
- The increased demand for housing and vehicle loans reflects growing confidence among households.
While India’s macroeconomic fundamentals seem resilient in the face of the current global challenges, the government should delve deeper into trends in consumption and employment. In the last quarter, there has been a significant decline in small car sales, and producers of consumer non-durable goods have reported weak demand in rural areas. IT companies have also scaled back their growth and hiring expectations. There is still much work to be done to rectify the uneven recovery, which could ultimately impede a more comprehensive investment resurgence.