Global financial stability, El Nino, among growth risks, says Finance Minister

“Global economic prospects continue to be uncertain and the latest developments in the financial markets, especially in the advanced economies, have added to this uncertainty. In its April 2023 update of the World Economic Outlook (WEO), the IMF has attempted to clear the path of uncertainty. It has projected global growth to decline from 3.4 per cent in 2022 to 2.8 per cent in 2023.

Growth is forecasted to marginally improve to 3.0 per cent in 2024, but not enough to beat the growth rate of 2022 while falling significantly short of the 6.4 per cent mark attained in 2021. Elevated inflation and financial tightening, which have weakened the growth process, are thus expected to weigh on economic activity for at least three years since the armed conflict broke out between Russia and Ukraine in February 2022,” it said.

Internal macroeconomic stability has further strengthened with easing inflationary pressures in March 2023, driven by the softening of food and core inflation, which fell to a 16-month low, it said. Retail inflation based on the Consumer Price Index eased to a 15-month low of 5.66 per cent in March, primarily due to a high base effect.

Going ahead, India’s inflation trajectory, however, may get influenced by volatile international crude oil market, the report said. “The volatility in crude oil markets continues, with OPEC+ countries deciding to cut crude oil production from May 2023. This has already led to a spike in crude oil prices in April 2023. However, the upside risk to prices appears to be short-term, as oil demand is expected to remain weak amid the global slowdown. Further, a built-up in inventories and a possible increase in US oil output will continue to put downward pressure on prices,” it said.
In addition, constrained supplies of milk and wheat are also expected to impact the inflation trajectory, the report said. “Milk inflation has remained elevated for several months due to a growing supply-demand mismatch. Milk production has been impacted by a Lumpy Skin Disease (LSD) infecting millions of cattle in late 2022. Even as this reduced milk supply, the price of milk further rose with high fodder and transportation costs.

“In December 2022, the government initiated the production of the vaccine Lumpi-ProVac for controlling and eradicating LSD in animals. The vaccination drive is expected to curb the spread and immune the cattle against the skin disease. While this would increase milk supply, a general drop in inflation will moderate the fodder and transport costs, thereby lowering milk inflation,” it said.

Highlighting the recent collapse of a few banks in the US and Europe and the takeover of the crisis-hit Credit Suisse Bank by the Union Bank of Switzerland (UBS), the report pointed out vulnerabilities of the financial system. It, however, said that India’s banking system is “considerably less prone to such developments” in the near-to-medium term future.

The report also cautioned about adverse weather conditions like drought owing to the El Nino weather phenomenon, which could impact crop production and add to price pressures. Geopolitical risks and global monetary tightening are also likely to weigh on India’s growth, it said.
“However, we reiterate that downside risks to our official forecast of 6.5 per cent for real GDP growth in 2023-24 dominate upside risks,” it said.

In terms of external factors, while weakening of global trade and growth may reduce India’s exports, widening India’s current account deficit, it could also pull down prices of imported goods and services, resulting in narrowing of CAD. India’s CAD had narrowed to 2.2 per cent in October-December in 2022-23 from 3.7 per cent in the previous quarter.