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The Finance Ministry's monthly economic review highlighted the importance of being vigilant against potential risks arising from geopolitical developments. Ongoing conflicts, trade disputes, and diplomatic tensions among countries can disrupt global trade and investment flows, impacting India's economic growth.
Global Financial Stability:
The report pointed out that recent developments in the financial markets, especially in advanced economies, have added to the uncertainty of global economic prospects. The International Monetary Fund (IMF) has projected a decline in global growth from 3.4% in 2022 to 2.8% in 2023, with marginal improvement to 3.0% in 2024. Financial tightening and elevated inflation in global markets can adversely affect India's economic activity, including investment flows and trade dynamics.
Weather-related Risks:
The report highlighted the risk of El Nino conditions leading to drought and lowering agricultural output, which can elevate food prices and impact India's inflation trajectory. The outbreak of Lumpy Skin Disease (LSD) in cattle in late 2022 has also affected milk production, leading to a supply-demand mismatch and increased fodder and transportation costs, contributing to elevated milk inflation. Adverse weather conditions like drought and other natural disasters can disrupt crop production and impact food prices, posing risks to India's agriculture sector and overall economic stability.
Inflation and Financial Tightening:
Elevated inflation and financial tightening were identified as key risks that have weakened India's growth prospects. Based on the Consumer Price Index, retail inflation eased to a 15-month low of 5.66% in March 2023, primarily due to a high base effect. However, volatile international crude oil prices, constrained supplies of milk and wheat, and other factors can influence India's inflation trajectory in the future. Domestically and globally, financial tightening measures can impact borrowing costs, investment flows, and overall economic activity.
Banking System Vulnerabilities:
The report highlighted the recent collapse of a few banks in the US and Europe and UBS's takeover of Credit Suisse Bank, pointing out vulnerabilities in the global financial system. While India's banking system was deemed less prone to such developments in the near-to-medium term, risks associated with banks' liquidity, solvency, and asset quality need to be monitored closely.
External Factors:
The weakening of global trade and growth can reduce India's exports, widening the current account deficit (CAD). However, it could also lead to lower prices of imported goods and services, narrowing CAD. India's CAD had narrowed to 2.2% in October-December 2022-23 from 3.7% in the previous quarter. Fluctuations in global trade and investment flows, as well as changes in exchange rates, can impact India's external sector dynamics, posing risks to its economic stability.
The economic review highlighted various risks to the Indian economy, including geopolitical developments, global financial stability, weather-related risks, inflation and financial tightening, banking system vulnerabilities, and external factors. These risks can impact India's economic growth, inflation trajectory, investment flows, trade dynamics, and overall macroeconomic stability. Vigilance, proactive policy measures, and close monitoring of these risks are important to ensure sustainable economic growth and stability in the future.