Outlook for Indian economy appears bright, but need to keep a watch on global headwinds: FinMin report

The outlook for the Indian economy appears 'bright' with GDP likely to clock 7 per cent growth rate next fiscal although the nation needs to keep a watch on global headwinds emanating from geopolitical tensions and volatility in international financial markets, a finance ministry report said on Tuesday.

During the current financial year, the Indian economy is estimated to grow at 7.3 per cent. This would be the third year in the row when the GDP would grow in excess of 7 per cent.

Driven by a better-than-expected performance in Q2 and above 7 per cent growth projection for FY24 (by Ministry of Statistics and Programme Implementation in its first advance estimates), many global agencies have revised India's growth projection in the upward direction, the Monthly Economic Review released by the finance ministry said.

This reflects the resilience of the Indian economy to sustain its growth path amidst ongoing geopolitical headwinds, it said, adding, the measures announced in the Interim Union Budget FY25 are expected to play a pivotal role in supporting India's growth journey ahead.

Talking about tailwinds for the next financial year, the report said prospects of healthy Rabi harvesting, sustained manufacturing profitability and underlying service resilience are expected to support economic activity in FY25.

On the demand side, household consumption is expected to improve, while prospects of fixed investment remain bright owing to an upturn in the private capex cycle, improved business sentiments, healthy balance sheets of banks and corporates, and the government's continued thrust on capital expenditure, it said.

Improvement in the outlook for global trade and rising integration in the global supply chain will support net external demand, it said. However, headwinds from geopolitical tensions, volatility in international financial markets, and geoeconomic fragmentation need watching, it said. Global slowdown, it said, especially in India's major trading partners, has led to a slowdown in demand for India's merchandise exports.

At the same time, it said, there has been a decline in the overall value of imports due to a fall in international commodity prices, which spiked after the outbreak of the Russia-Ukraine conflict.

This has led to a narrowing of India's merchandise trade deficit in the first ten months of FY24, it said, adding, a narrowing merchandise trade deficit, coupled with rising net services receipts, is expected to result in an improvement in India's current account deficit.

As far as capital account is concerned, India's strong macroeconomic fundamentals, high growth and stable business environment have boosted Foreign Portfolio Inflows (FPIs).

On the inflation, it said, pressure has moderated in January 2024 due to a fall in food as well as core inflation. The recent measures announced by the government to control food prices are likely to reduce inflation further, it said.

The expectations of the fading away of El Nino and the forecast of a normal monsoon bodes well for a better-than-normal kharif sowing, it said.

On the employment front, it said, the urban unemployment rate in Q3 of FY24 declined to 6.5 per cent, the lowest since the start of the Periodic Labour Force Survey (PLFS).

Formal sector employment also showed robust growth, as indicated by a steep rise in the subscription base of the Employees Provident Fund Organisation (EPFO), it said.