El Nino, oil cartel threat to 6.5% GDP growth target: Centre

India’s 6.5 per cent GDP growth target for the current financial year faces major downside risks from the spike in oil prices due to OPEC’s surprise cut in output, financial sector troubles in advanced countries and El Nino that might hit monsoon rains, the Union finance ministry said.

“We reiterate that downside risks to our official forecast of 6.5 per cent for real GDP growth in FY24 dominate upside risks,” the ministry said in its monthly economic review report.

OPEC’s surprise production cut has seen oil prices rise in April from their low-seventies per barrel in March. Further troubles in the financial sector in advanced nations can increase risk aversion in financial markets and impede capital flows. Forecasts of El Nino, at the margin, have elevated the risks to Indian monsoon rains, the ministry noted.

Also Read | Why is OPEC cutting oil output?

The Organisation of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, have announced a reduction in oil production by 1.16 million barrels a day. The output cut will begin in May 2023 and last for the entire calendar year.

OPEC’s announcement made in the first week of this month led to a surge in crude oil prices in the global markets posing risks to India’s growth and inflation targets.

According to private weather forecasting agency Skymet, monsoon rainfall is likely to be below normal due to El Nino. However, India Meteorological Department has forecast a normal rainy season. The Indian farm sector is heavily dependent on monsoon rains.

Another issue, which poses major downside risk to the Indian economy is the banking crisis in advanced economies, especially the US and European countries.

Referring to the April 2023 update of the IMF’s World Economic Outlook, the finance ministry noted that India is projected to be the fastest-growing economy in FY24.

Also Read | Surprise oil output cut by OPEC+ to delay price revision in India

“It is important, however, 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,” the ministry said.

“All these three could affect the favourable combination of growth and inflation outcomes currently anticipated,” it added.

The Economic Survey 2022-23 and the Reserve Bank of India (RBI), both have pegged India’s GDP growth at 6.5 per cent for the fiscal 2023-24.

The global multilateral agencies’ projections are lower than the government’s estimate.

On the financial sector, the report noted that banking supervision in India is robust and there is less possibility of Silicon Valley Bank (SVB)-like incidents occurring in the country.

The report underlined that 60.1 per cent of India’s deposits are with the public sector banks while 63 per cent of total deposits are owned by households considered sticky retail customers. “Therefore, deposit withdrawals in this category will remain limited,” it said.