India’s economic stability shines bright despite external threats

indian economic growth
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In its annual review report released on Thursday, the Finance Ministry highlighted that the Indian economy is displaying a more durable growth trajectory than in the past. However, the report cautioned that several external factors pose a threat to India’s growth momentum.

The ministry emphasized the need to maintain vigilance and not become complacent, despite the positive economic outlook. It stated that India’s painstakingly achieved economic stability should not be diluted, as sustained growth is contingent upon continued efforts.

The report acknowledged that investments in supply-side infrastructure by the government have the potential to extend India’s economic growth for a longer period than seen in previous decades. However, it also highlighted external challenges that may hinder India’s growth in the ongoing fiscal year.

Factors such as geopolitical tensions, increased volatility in global financial systems, sharp price corrections in global stock markets, El Nino weather patterns, modest trade activity, and reduced foreign direct investment (FDI) inflows are expected to constrain India’s economic pace.

The Finance Ministry noted that until the first quarter of FY23, India benefited from favorable external demand. However, as central banks globally began tightening monetary policies to curb inflation, India’s merchandise exports were impacted. The report also acknowledged that India’s economy benefited from declining global commodity prices, which lowered import costs throughout FY23.

Despite facing unprecedented global challenges in recent years, coupled with domestic balance sheet troubles in banking and non-financial corporate sectors, the report commended India’s macroeconomic management. It credited the stellar macroeconomic management for enhancing India’s stability and enabling a quicker recovery compared to other nations.

The report highlighted the disciplined fiscal stance of the central government as a critical factor in India’s economic growth. The fiscal deficit (as a percentage of GDP) for the year ended lower than the previous year, demonstrating the government’s commitment to maintaining fiscal prudence.

The Finance Ministry pointed out that India’s domestic demand remains a strength for the economy. It stated that the momentum from the previous fiscal year has carried over into the current fiscal year, and rural demand is showing signs of recovery. Data indicates that FMCG volume sales in rural areas turned positive in the last quarter of the previous fiscal, indicating an upturn in rural demand.

Regarding public debt, the report noted that India’s debt burden stood at 50.6% of GDP at the end of Q3FY23. Although higher than the pre-pandemic level of 42.8% in FY20, it has reduced from its peak of 52.6% in Q1FY22. The report expressed confidence in India’s ability to manage its debt leverage as the economy continues to grow above pre-pandemic rates.

FDI flows to India were affected by inflationary pressures and tighter monetary policies abroad, leading to a 16% year-on-year decline in FY23, following a record high of $84.8 billion in FY22. The report emphasized the importance of closely monitoring FDI data and implementing measures to facilitate FDI inflows, including addressing infrastructure challenges, ensuring labor availability, and facilitating large-scale capacity creation.

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