Finance ministry optimistic on India’s growth despite global stress

 The Indian economy is set to achieve a growth rate of over 6.5%, thanks to a stronger-than-expected performance in July-September (Q2FY24), the finance ministry said on Friday.

In its semiannual economic review for FY24, the ministry said while there’s widespread optimism about India’s growth prospect among domestic and foreign investors, the risks to growth and stability will primarily emanate from external factors.

Interestingly, Reserve Bank of India (RBI) recently revised India’s growth outlook from its earlier estimate of 6.5% to 7%, after it surpassed expectations, clocking impressive growth of 7.6% in Q2, to retain its crown as the fastest growing major economy in the world. India clocked 7.8% gross domestic product growth in Q1 FY24.

“Downside risks to growth arise from smouldering inflationary pressures in advanced countries and supply chain disruptions re-emerging from persistent geopolitical stress, while geopolitics is an independent source of risk,” finance ministry said in the report. However, India’s domestic economic momentum and stability, low to moderate input cost pressures and anticipated policy continuity are significant buffers,” the ministry added.

While India has witnessed robust growth, the tightening of interest rates in the West, driven by persistent inflation, resulted in a slowdown in business, investment, and trade, which has had an impact on its exports, it said.

Besides, escalating conflicts in Ukraine and Israel is threatening shortage in commodity, driving up oil prices and intensifying inflationary pressures, it added.

The report was released by the Department of Economic Affairs. Inflationary pressures moderated in the first half of FY24 primarily on the back of stable and declining core inflation, it said. “However, food inflation remained volatile during this period due to weather-driven supply chain disruption. Globally, food inflation is at elevated levels despite an easing headline inflation.”

In the report, the finance ministry was optimistic about employment, highlighting the recovery of the labour markets to pre-pandemic levels. Furthermore, it said high frequency indicators reflect an improvement in India’s overall employment across sectors. It said formal sector employment has also recorded robust growth, as indicated by a steep rise in the subscription base of Employees’ Provident Fund Organization (EPFO).

“Outlook for employment sector appears bright, with employers intending to maintain or expand their workforce.”

The ministry said persistent geopolitical tensions exacerbated weakness in global trade following slowing global output.

Merchandise exports have contracted in the first quarter of FY24, the report said. “Merchandise exports and imports of India have thus contracted in H1 of FY24 but in a manner that has improved merchandise trade deficit.”

Besides, increasing foreign portfolio investment has further fuelled optimism as they became net buyers during the first half of FY24, in contrast to being net sellers in H1 FY23.