Finance Ministry: Growth on track, but India must be vigilant against major potential risks

India must be vigilant against potential risks of lower agriculture production, rising prices and geopolitical developments, the finance ministry has warned.

Although the 6.5 per cent growth projection for the current fiscal is in line with international estimates, some factors could derail the favourable estimated conditions of growth and inflation outcomes, the March edition of the Monthly Economic Review said.

“It is important… to be vigilant against potential risks such as El Nino conditions creating drought conditions and lowering agricultural output and elevating prices, geopolitical developments and global financial stability,” it said.

The report said FY23 had been strong for the Indian economy despite the tailwind of the pandemic and the headwind of the geopolitical conflict combining to worsen global economic uncertainty.

Review report

“The strength is seen in the economy, estimated to grow at 7 per cent, higher than the trend rate and the growth of the other major economies,” it said.

“Growing macroeconomic stability as seen in the improved current account deficit, easing inflation pressure, and a banking system strong enough to survive the increase in policy rates, has made the growth rate further sustainable,” it added.

The report said the banking supervision was robust with the RBI’s overarching coverage of institutions, regardless of asset size, in its bi-annual assessment of financial stability.

Macro stress tests were also performed from time to time on individual banks. Investment in held-to-maturity (HTM) securities is limited to 23 per cent of deposits, reflecting an effective insulation of asset value from adverse market developments, it said.

Indian banks

Finally, rapid withdrawal of deposits was unlikely as 63 per cent of the deposits contributed by the households were considered sticky, it said.

All these factors make Indian banks different from the US and European banks who battled problems following the unwinding of tight monetary policy.

On price situation, the report said the sequential growth of CPI-core in March 2023 was the weakest since June 2022 and can be attributed to the beginning of the pass-through of declining WPI inflation in consumer goods prices.

Although CPI for the full year rose from 5.5 per cent in FY22 to 6.7 per cent in FY23, it was much lower in the second half of FY23 at 6.1 per cent compared to 7.2 per cent in the first half.

“The easing of international commodity prices, the promptness of measures taken by the government, and monetary tightening by the RBI have helped to rein in domestic inflation.” It said.

Inflation

“Inflationary expectations also appear to be anchoring as witnessed in various surveys for households and businesses,” it said.

On the external sector, it said the narrowing of the Current Account Deficit (CAD), accompanied by a rising inflow of foreign portfolio investment (FPI), resulted in an increase in foreign exchange reserves by the end of Q3.

With forex reserves further increasing by the end of FY23, prospects of a still narrower CAD in Q4 were bright, it said.

(With inputs from agencies)