It’s choppy waters ahead for India’s economy

Prospects for the Indian economy to reach the budgetary target of 6.5 per cent growth in the current fiscal seem brighter with some data showing buoyancy in key areas. These include higher Goods and Services Tax (GST) collections along with a spurt in core infrastructure sectors.

Yet there are several headwinds that could potentially slow down growth in the coming months. The rise in world oil prices, sluggishness in exports and mounting inflationary pressures in the wake of a less-than-normal monsoon can be counted among them.

The economic recovery also appears to be uneven with two-wheeler sales, largely aimed at the rural market, continuing to grow at a slower pace than the booming passenger car segment. The story of companies in the fast moving consumer goods (FMCG) sector, relying on small packs owing to reduced demand in rural areas also continues to be an issue. This is in sharp contrast to urban areas with robust sales.

On the positive side, GST collections continued their rising trends with a 10 per cent spurt in September to reach Rs 1.63 lakh crore. As for infrastructure, the core sector industries recorded a 14-month high of 12 per cent in August. The segments covered by the data are cement, coal, crude oil, electricity, fertilisers, natural gas, petroleum refinery products, and steel. The highest growth was in the cement and coal industries which rose by 18.9 and 17.9 per cent respectively. The fillip in output is not just on a year-on-year basis but also compared to the previous month, July with a rise of 8.4 per cent.

These sectors comprise a major chunk of the Index of Industrial Production (IIP), making it evident this indicator will look up in August. The index showed 5.7 per cent rise in July, largely due to the mining and electricity sectors. Manufacturing, on the other hand, had remained at a tepid 4.6 per cent.

Recent reports are also glowing about sales of passenger cars, smartphones, and white goods. In contrast, two-wheeler sales are not rising at the same pace though some companies report higher growth than others. Given that nearly 50 per cent of these vehicles are sold in rural areas, it is apparent the recovery is not yet broad-based. This is reflected equally in the policy of offering small product packs in rural markets by leading FMCG players. The strategy has attracted considerable attention lately due to distributors facing difficulties in stocking them, and is meant to provide goods at more affordable price points for rural consumers facing inflation worries.

More challenges are in store in the coming months especially with global oil prices hardening rapidly. These have gone up from manageable levels of $75-80 per barrel in June to $90+ per barrel currently. A country like India, the third largest crude importer globally, which relies for over 85 per cent of its oil needs from abroad, will face a rising import bill on this account. The cost of buying oil had risen from $121 billion in 2021-22 to $158 billion in 2022-23. It could go up even further if forecasts of oil touching $100 per barrel play out in world markets next year.

This, in turn could put pressure on India’s current account deficit. It becomes an even greater concern since elevated oil prices come at a time when merchandise exports are slowing down. These have been contracting consistently for the last nine months, reflecting recessionary trends in major developed economies. The silver lining till recently has been the continuing surge in services exports, but these have begun to decline recently with the high-interest scenario in the US constraining spending by corporates.

The erratic monsoon has also created uncertainty over whether demand will rise to the extent needed during the coming festival season. The irregularity in terms of the spread of rainfall could translate into lower yields for rainfed crops like pulses. Food inflation may thus continue for some time and end up constraining rural demand.

In other words, growth in the current fiscal (2023-2024) is likely to slow down in the second half of the financial year. The first quarter (April to June) began at a promising 7.8 per cent, higher than the 6.1 per cent recorded in the last quarter of 2022-2023. With surging world oil prices and sluggish demand in overseas export markets, the current account deficit is bound to come under pressure. The outlook on this front is ominous with the trade gap having already widened to a 10-month high of $24.6 billion in August.

So recent data may point to brighter prospects for an over 6 per cent GDP growth in the current fiscal, but a host of pitfalls remain on the way to achieving this target. External and domestic headwinds persist, highlighting the need to avoid complacency over the economy remaining on a moderately high growth path.

(Sushma Ramachandran is a senior journalist.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.