Global financial stability, El Niño amid growth risks, finance minister says


In its monthly economic review for March, released on Tuesday, the Ministry of Finance listed risks for the Indian economy, including geopolitical developments, global financial stability, drought conditions due to El Niño, and agricultural production. Decrease in quantity, and increase in price. Higher inflation and tighter monetary policy weaken growth prospects and are expected to weigh on economic activity through February 2025.

However, the report said that macroeconomic stability reflected by an improving current account deficit, easing inflationary pressures and a strong banking system has made growth sustainable.

“The global economic outlook remains uncertain, and recent developments in financial markets, particularly in advanced economies, add to this uncertainty. The IMF has tried to navigate the way through uncertainty, forecasting global growth to slow to 2.8% in 2023 from 3.4% in 2022.

Growth is projected to improve slightly to 3.0% in 2024, but not enough to outpace growth in 2022 and well below the 6.4% mark achieved in 2021. It is therefore expected to weigh on economic activity for at least three years after the outbreak of armed conflict between Russia and Ukraine in February 2022.”

Domestic macroeconomic stability was further strengthened as inflationary pressure eased in March 2023. The consumer price index-based retail price index fell to a 15-month low of 5.66% in March, largely due to a high base effect.

Going forward, however, India’s inflation trajectory could be affected by volatile international oil markets, the report said. “Crude oil market volatility continues and OPEC+ countries have decided to cut crude oil production from May 2023. This has already caused oil prices to skyrocket in April 2023. , upside risks to prices appear to be short-term, as oil demand is expected to remain weak amid the global The potential will continue to put downward pressure on prices.”
In addition, restricted milk and wheat supplies are also expected to affect the trajectory of inflation, the report said. “Milk inflation has remained high for months as the mismatch between supply and demand widens. LSD), which reduced the supply of milk, but increased the price of milk further due to higher feed and transportation costs.

“In December 2022, the government started manufacturing the vaccine Lumpi-ProVac to control and eradicate LSD in animals. “While this will increase the supply of milk, lower general inflation will ease feed and transportation costs, thereby reducing milk inflation.”

Focusing on the recent bankruptcies of several US and European banks and the takeover of crisis-hit Credit Suisse by Switzerland’s Union Bank (UBS), the report pointed to the fragility of the financial system. However, he said India’s banking system would be “significantly less prone to such developments” in the near to medium term future.

The report also warned that adverse weather conditions, such as drought caused by El Niño, could affect crop production and increase price pressures. Geopolitical risks and global monetary tightening are also likely to weigh on India’s growth, he said.
“However, we reiterate that downside risks to our official forecast of 6.5% real GDP growth in 2023-24 dominate upside risks.”

As for external factors, weaker global trade and growth could reduce India’s exports and widen India’s current account deficit, while depressing prices of imports and services, leading to a contraction of the CAD. There is also India’s CAD contracted from 3.7% in the previous quarter to 2.2% in October-December 2022-2023.

© Indian Express (P) Ltd

First published date: Apr 26, 2023 05:20 IST

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