Outlook bright, but demand needs monitoring: MoF

New Delhi: India’s economic outlook remains bright, underpinned by a stable external sector, positive farm prospects and chances of higher government spending to make up for the shortfall during the general elections but “underlying demand conditions bear watching”, the finance ministry said on Monday in its monthly economic review for September.

While rural demand continued to strengthen in the first half of the current fiscal, urban demand appeared to have moderated “due to softening consumer sentiments, limited footfall due to above-normal rainfall, and seasonal periods during which people tend to refrain from new purchases”, the review said. It, however, added that the ongoing festive season may lift demand.

Further, risks to growth stem from escalating geopolitical conflicts, deepening geo-economic fragmentation and elevated valuations in financial markets in some advanced economies.

“Their spill-over effects on India could cause negative wealth effects, impacting household sentiments and altering spending intentions on durable goods,” it said. The review pegged the FY25 economic growth at 6.5-7%, the same as that forecast in the last Economic Survey.

The agriculture and services sectors have performed well this fiscal, the review said. The manufacturing momentum has softened a tad but central bank surveys indicate improved business expectations for the upcoming quarters.

Inflation appears “well contained”, despite the spike in the price of a few vegetables driving up the headline retail inflation to a nine-month high of 5.49% in September, it said.

Over the medium term, rejuvenated reservoir levels and healthy kharif crop sowing have brightened the farm prospects, which would help curb price pressures further, it added.

“Core inflation continues to remain within the comfort zone, exhibiting no pass-through from food inflation of the past or the present,” the review said.

However, heavy monsoon downpours have had a calming effect on mining and construction activity and led to a moderation in services activities, particularly road transport, in the September quarter. “Nevertheless, business sentiments remain sanguine,” it said.

As for the external sector, capital inflows have risen, the rupee remains stable and foreign exchange reserves have gone past the $700-billion mark, the fourth-largest globally. Rising services exports and growing remittances have cushioned the rising current account deficit, driven by poor merchandise export growth.

The labour market is steady, with the 2023-24 unemployment rate remaining unchanged at 3.2%, driven by a rising female workforce. “All that said, anecdotal reports of the deployment of artificial intelligence displacing workers are beginning to emerge. That needs watching,” it added.

While import volumes may rise during the festive season, overall import value may still drop due to a decline in global commodity prices, especially of oil.

Moreover, success of the production-linked incentive schemes enhanced utilisation of free trade agreements and further rate cuts in India’s major exporting partners could “give impetus” to India’s merchandise exports, it said.