While maintaining a “cautiously optimistic” economic outlook for the coming months for the Indian economy, the Finance Ministry in its monthly economic review for October released Monday stated that agriculture is likely to benefit from favourable monsoon conditions, increased minimum support prices and adequate supply of inputs. The Ministry also underlined that most countries are loosening monetary policy, with a broad consensus that after a successful disinflationary phase, monetary policy will have to be eased to avoid recession. These comments come in the backdrop of Finance Minister Nirmala Sitharaman stating last week that if Indian industry is to expand and build new capacities, “our bank interest rates will have to be far more affordable”. Commerce Minister Piyush Goyal has also said that the RBI shouldn’t factor in food inflation while taking a decision on lowering its policy interest rates, which have been unchanged since February 2023, adding that it is his personal view and not that of the government. The RBI, on the other hand, has termed the 6.2 per cent October inflation number as a “sticker shock”, stating that if the current inflation is allowed to run unchecked, it “can undermine the prospects of the real economy”. The Ministry also pointed out the emergence of a few downside risks to global growth that may impact developing economies. "Financial assets such as bond prices may be repriced if inflation proves stubborn, driven by global tensions and commodity prices. That can lead to tighter conditions and potential market instability. This may affect developing economies that are vulnerable to higher borrowing costs," it said. Talking about global disinflation, the Ministry pointed out price pressures across economies have abated substantially after peaking towards the end of 2022 on account of central bank policy rate hikes and improved supply chain resilience. “As inflation approaches the central bank target levels, disinflation seems to have slowed on account of sticky core inflation. This is due to persistence in services price inflation driven by higher nominal wage growth. There are early signs of wage growth moderating, which will aid disinflation…however, IMF (International Monetary Fund) notes that fiscal consolidation across economies between 2022 and 2024 has not played out as planned, thereby contributing to inflationary pressures. Adverse weather events and their effects on food prices may also affect disinflation, particularly in EMEs (emerging market economies),” it said. Retail inflation in India rose to a 14-month high of 6.2 per cent October driven by elevated food inflation, especially vegetables. The Ministry said tomatoes, onions, and potatoes faced pressure due to supply disruptions due to heavy rains in major producing states and tighter market stock amid lower output last year. Imported inflation drove the increase in oil and fat inflation from elevated international prices of edible oils, it said. However, a continuous easing trend is visible in pulses, spices and sugar, the Ministry said. Going ahead, a bumper kharif harvest is expected to lower food inflation in the coming months. “Favourable monsoon, adequate reservoir levels and higher minimum support prices are likely to boost rabi sowing and production,” it said, adding that bright agricultural production prospects make the inflation outlook benign, despite existing price pressures in select food items. However, the Ministry said geopolitical factors may continue to impact domestic inflation and supply chains even as early November trends show moderation in key food prices. On the employment front, it said, the formal workforce is expanding, with a notable increase in manufacturing jobs and a strong inflow of youth into organised sectors. On the external front, the Ministry said India's export recovery may encounter challenges due to softening demand in developed markets even though trade in the services sector is sustaining momentum. Apart from the emerging indications of domestic growth and stability, the dynamics of global interest rates, earning growth and valuation, geopolitical developments and policy decisions of the next administration in the United States will determine the course of trade and capital flows, the Ministry said.
