New Delhi: India’s economic growth faces downside risks from the ongoing West Asia conflict and the possibility of below-normal monsoon rains, both of which could add inflationary pressures, the finance ministry cautioned in its latest monthly economic review released on Wednesday.
However, strong domestic demand, supportive policy buffers, and robust public investment are likely to cushion the economy, the April review added.
“Risks are tilted to the upside for inflation, fiscal and external deficits and to the downside for economic growth. However, while striving to sustain economic growth, policy is expected to safeguard medium-term fiscal and external stability,” the review said.
The review also noted that to the final consumer may be inevitable. Some countries have begun to allow prices to be passed on to end-users—households and businesses—but some are yet to do so, it said.
“But it is inevitable. During a period of supply disruption, demand has to moderate; failing that, countries will have to pay a much higher price for energy supplies,” the review said.
India’s crude oil basket averaged $113 per barrel in March, and it is just under $115 for April until the 24th, the review said. The review pointed out that the ‘supply shock’ arising from the is apparent in the economy.
An accompanying demand compression is a serious concern, given rising inflation, and a reduced pace of economic activity, the ministry said. The dent in investor confidence due to the conflict has disproportionately hit emerging economies including India and the consequent weakening of the is a pressure point for domestic inflation in view of higher import prices, the ministry noted.
The monthly review, prepared by the economic division of the Department of Economic Affairs, however, called for balancing the need to support short-term growth with the imperative of maintaining medium-term fiscal stability.
The need for tax policy certainty and predictability has never been greater, it said. The risks of “excessive focus on short-term growth preservation should not override the broader macroeconomic interests of attracting investment and boosting domestic capital formation,” the review said. There is no contradiction between the two in the end, it added.
The review pointed out that the West Asia conflict constituted a significant supply shock with rising risks to inflation, trade, and financial flows. India’s domestic demand, policy buffers, resilient financial system, and sustained public investment provide some insulation but whether they would prove adequate in the event of prolonged uncertainty about energy and fertilizer supplies is an important question, it said.
Separately, the Asian Development Bank (ADB) on Wednesday sharply lowered its developing Asia and pacific growth forecast to 4.7% this year and 4.8% next year, down from 5.1% for both years projected in its outlook earlier this month, saying that severe and prolonged disruptions from the West Asia conflict continue to raise energy prices, tighten financial conditions, and weigh on economic activity across the region.
“We are confronting systemic, long-lasting disruptions to global energy and trade networks, not just temporary volatility,” ADB President Masato Kanda said in a statement.
The finance ministry said in its review that India can leverage its strong domestic fundamentals and tradition of strategic autonomy as an opportunity in the current global context.
“A multipolar world creates space for India to convert diplomatic goodwill into durable economic gains. As a manufacturing destination, services hub and a large consumer, India can push for more ambitious trade agreements and diversified supply chains,” the review said.