Amid gloomy global prospects, India’s economy is upbeat and is expected to remain the world’s fastest-growing major economy in 2024 for the third straight year. Inflation is moderating, demand is growing and economic activity is strengthening. The finance ministry expects the GDP growth rate in 2023-24 to “comfortably” exceed its forecast of 6.5 per cent following the blockbuster data for July-September.
On the inflation front, the ministry has stated that with the stable downward movement in core inflation and continuing deflation in fuel inflation, the headline inflation outlook is on a declining trend, notwithstanding temporary disruptions from food prices. The RBI has projected inflation to average at 5.4 per cent in FY24. High-frequency indicators including vehicle sales and power consumption, for October and November 2023 reflect robust economic activity in the third quarter of FY24, which is likely to continue in the fourth quarter as well, the Finance Ministry said.
India recorded a GDP expansion of 6.1 per cent in the March quarter. The growth moved up to 7.8 per cent in the June quarter and was 7.6 per cent in the September quarter. For the first six months of this fiscal, the growth was 7.7 per cent.
Yet, there are risks to the economic growth and stability in 2024, mainly emanating from outside the country. Below are four factors that can impede growth and threaten stability in 2024.
A change of government
In the upcoming Lok Sabha elections, the ruling BJP is widely expected to come back to power and continue with its economic agenda. However, if a coalition government is formed by the opposition parties, there are chances it may not bode well for the economy. Coalition governments in themselves are not bad for the economy; they could even be better given the need for a wide consensus in a coalition government on economic matters and thus fewer chances of radical measures that upset the economy. But in the current circumstances, a possible threat can emerge from policy rupture, especially given the thrust of the opposition parties on populist and welfare politics as against the aggressive growth agenda pursued by the incumbent government. A win for the incumbent government will be seen as a vote for the government’s policies which will give the government more confidence to stick to its agenda.
However, a coalition government could be just a temporary shock to the economy in case of a radical change in the policies and agendas.
Worsening of geopolitical crises
The Israel-Palestine war broke out last year while the Russia-Ukraine war was still lingering on. Either of these two geopolitical crises can worsen, especially with the growing chances of the Israel war spilling over as the Houthi rebels of Yemen and Hezbollah militant group based in Lebanon acting more aggressively. Already, the Iran-backed Houthis are striking at naval transport in the Red Sea, a vital shipping route for the world. Maersk, one of the world’s major cargo shippers, said on Sunday it was pausing all sailing through the Red Sea for 48 hours after the Houthis attacked a Maersk container vessel with missiles and small boats.
The Red Sea is the entry point for ships using the Suez Canal, which handles about 12% of global trade and vital for the movement of goods between Asia and Europe. A wider war erupting in the region will jeopardise supply chains once again after the disruptions caused by the pandemic and the Russia-Ukraine war, spiking commodity prices, including of oil.
That will be bad for India’s fiscal stability as the country relies largely on imports for its energy needs. A wider war will also create pressures on food supply. Higher oil and food prices might spike India’s inflation, which now seems to be calming down. The RBI is expected to cut interest rates in the second half of the year mainly due to a lowering inflation. But a flared-up war might force its hand to hike rates. It had paused its rate-hike cycle in April last year. Higher rates will impede economic growth.
Food supply shocks
Food inflation remained at an elevated level throughout the year after touching a low of 2.96 per cent in May. In November, it stood at 8.7 per cent.
The agriculture ministry has come out with its initial estimates which do not give a positive picture due to the projection of a likely slight drop in the 2023 kharif food grain output at 148.56 million tonnes as against 155.7 million tonnes in the year-ago period due to “below average” rainfall in the four-month (June-September) monsoon season amid strengthening of El Nino conditions. However, ministry officials are of the view that the kharif food grain production estimates will be revised positively by the time the fourth and final estimates are prepared.
Last year too, the country faced erratic weather conditions and yet could achieve a record food grain production of 329.68 million tonnes in the 2022-23 crop year (July-June) as per the ministry’s final estimates. However, a sudden temperature rise sparked concern about last year’s wheat output leading to an export ban in May 2022 to check high domestic prices.
The fact remains that India’s foodgrain output remains vulnerable to shocks.
In the minutes of the latest MPC meeting, RBI Governor Shaktikanta Das held reservations about inflation, which has receded from highs, but remains volatile. “The overall inflation outlook is expected to be clouded by volatile and uncertain food prices and intermittent weather shocks. In the immediate months of November and December, a resurgence of vegetable price inflation is likely to push up food and headline inflation,” Das said.
In the midst of uncertainties, monetary policy has to remain “actively disinflationary” to ensure a durable alignment of headline inflation to the target rate of 4% while supporting growth, Das has said.
Foodgrain and vegetable supply shocks can push inflation up, since food inflation accounts for nearly half of the overall consumer price basket. The RBI keeps a keen eye on inflation and any spike will make it averse to cutting rates or, in a worse case, even hike rates once again.
The RBI, in its December bulletin, stated that the real-time inflation is adversely impacting discretionary consumer spending. This, in turn, is impeding the overall growth of manufacturing companies, including their capital expenditure, it said. In its December policy meeting, the central bank left its inflation forecast for this fiscal year unchanged at 5.4 per cent, despite food price rise concerns, uncertainty around crude costs even amidst a recent slump and chances of domestic growth momentum creating demand pressure on inflation.
The pandemic scare
The recent surge in Covid cases and the prevalence of subvariant JN.1 have triggered fears of the return of the pandemic days even though experts say the new subvariant is high in transmission but less virulent. India has logged 841 new cases of Covid, the highest in 227 days, while the number of active cases of the infection have been recorded at 4,309, the health ministry said on Sunday.
The unpredictability of new Covid variants always looms as a threat. The economic devastation wreaked by the pandemic that brought the world to a halt for nearly two years will remain a concern even though by now most experts do not consider the possibility of such a large-scale disruption happening again even as new Covid strains come and go. Yet, another possible outbreak will remain a risk for years to come.
Finally, at present, it appears the biggest possible risk to India’s economy in 2024 is global geopolitical flashpoints, mainly the Israel war spilling over and drawing in more actors. But given the robustness of India’s economy, India is expected to be well-poised to tackle such a risk.
(With inputs from PTI)
