The Finance Ministry on Tuesday reiterated that downside risks dominate the upside risks to the official 6.5% GDP growth projection for this year, as the prospect of El Nino conditions triggering a drought, along with geopolitical developments and concerns about global financial stability could affect the “favourable combination of growth and inflation outcomes currently anticipated”.
The OPEC+ grouping’s surprise production cut has seen oil prices rise in April, off their lows of low $70s per barrel in March, the Ministry said in its monthly economic review. “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,” it noted, stressing the need to be vigilant on these potential risks.
Arguing that the weakening of global growth and trade was expected to both weaken and strengthen the stability of India’s external sector, the Ministry said lower exports could widen the Current Account Deficit (CAD). However, global economic weakness could also reduce the value of imports due to easing commodity prices, thus helping narrow the CAD.
“So far, the net impact of the two opposing effects has been positive in narrowing the CAD. This has strengthened the stability of India’s external sector,” it observed.
Highlighting the easing of inflationary pressures, reflected in core inflation slowing to a 23-month low of 5.7% in March with the sequential uptick at the weakest since June 2022, the ministry however cautioned that volatile crude oil prices and constrained supplies of milk and wheat may affect the inflation trajectory.
“Milk inflation has remained elevated for several months due to a growing supply-demand mismatch,” the Ministry noted, adding that the Lumpy Skin Disease had hit millions of cattle in late 2022 which had dented supplies even as fodder and transport costs rose.
A vaccination drive initiated by the government last December is expected to curb the spread of the disease and would help increase milk supply, even as a general drop in inflation would moderate fodder and transport costs, the Ministry averred.
“Although the second advance estimate has projected a record foodgrain production, the crop damage caused by unseasonal rains and hailstorms in some parts of the country since mid-March may constrain wheat production, besides perishable items such as fruits and vegetables,” it cautioned.
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