India’s Economy Shows Promising Start in 2023-24 with Strong Domestic Demand and Receding Inflation

The ministry expects prices of all commodities except precious metals, to moderate this year, though they would stay well above pre-pandemic levels.
| Photo Credit: KRISHNAN VV

The first month of 2023-24 has seen strong, albeit seasonally moderated economic activity, and demand is expected to strengthen in the wake of receding inflation, fuelling a virtuous investment cycle whose signs are already visible despite higher interest rates, the Finance Ministry said on Monday.

“There are downside risks to growth and upside risks to inflation, partly channelled through the external sector and partly originating from weather uncertainties. Yet a strong point going India’s way is the strength of its domestic demand,” the ministry said in its monthly economic review of April.

“Consumption has shown steady and broad-based growth, while investment in capacity creation and real estate is finding traction… As inflation further recedes, demand will become stronger and lay the foundation of a virtuous capex upcycle,” it emphasised, while conceding it is too early to forecast the entire year’s outcomes. 

“A good beginning, though, is a harbinger of positive outcomes,” the review said, adding that crops are unlikely to suffer despite uncertainties about the monsoon as reservoir levels are healthy. 

The ministry expects prices of all commodities except precious metals, to moderate this year, though they would stay well above pre-pandemic levels. 

“Going forward, several factors, such as weaker than expected oil supply, higher than anticipated demand from China, intensification of geo-political tension and unfavourable weather conditions, may pose an upside risk to these forecasts. Prices of commodities sensitive to El Niño effects, such as coffee, rice, palm oil, and natural rubber, need to be continuously monitored,” it cautioned. 

Higher crop support prices, healthy prospects for the Kharif season and government spending will likely enhance farmers’ incomes and boost the rural economy, the ministry averred, noting that demand indicators are gaining momentum as seen in two- and three-wheeler sales in April and a rapid uptick in consumer non-durables’ sales in the last quarter of 2022-23.

“Going ahead, rural demand is expected to strengthen further in the first quarter of FY24 as procurement of a good Rabi crop harvest increases rural incomes,” adding that higher construction activity will also translate into higher remittances to rural areas from migrant workers.

“Improvement in labour market conditions and likely uptick in construction activity has led to a decline in demand for work under MGNREGS in April 2023 on a year-on-year basis. Further, to lessen the impact of inflation on rural labourers, the government has increased the daily wages under MGNREGS on average by 6% effective from 1st April 2023,” it underlined, noting this would also spur demand.