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--Fin min: Rising protectionism may also hamper growth 
--Fin min: Rural demand "particularly striking" in Oct 
--Fin min: India econ outlook for coming months cautiously optimistic 
--Fin min: Geopolitical conditions remain fragile 
--Fin min: Export recovery may be tough on softening demand in developed mkts 
--CONTEXT: Comments by fin min in monthly econ review for Oct 
--Fin min: High frequency indicators show rebound in econ activity in Oct

 

NEW DELHI - Amidst talk of a slowdown in the Indian economy, the finance ministry Monday said it was cautiously optimistic about the economic outlook for the coming months. While domestic demand is shaping up well, the ministry said its optimism is contingent on exogenous pressures.

 

"Amidst a clouded global background, and after a brief period of softening momentum over the monsoon months, many high-frequency indicators of economic activity in India have shown a rebound in October," the ministry said in the Monthly Economic Review for October. Data over the last month and a half has suggested the growth momentum is cooling down.

 

Data released in August showed India's GDP growth fell to a five-quarter low of 6.7% in Apr-Jun, 40 basis points lower than the Reserve Bank of India's projection of 7.1%. The GDP growth data for Jul-Sep will be released on Friday.

 

The finance ministry's view on a rebound in economic activity is aligned with the views of the RBI's staff expressed in the monthly State of the Economy article, which includes Deputy Governor Michael Patra as one of its co-authors. The views expressed in the article, which was released Wednesday, do not reflect the central bank's official stance.  

 

Though demand continues to grow steadily as indicated by improving fast-moving consumer goods sales volumes in Jul-Sep in both urban and rural areas, the finance ministry said rural demand was "particularly striking". This was reflected in the robust growth of two-wheeler sales and record-high tractor sales in October, the ministry said. 

 

According to data by the Federation of Automobile Dealers Associations, two-wheeler retail sales for October were 2.07 million units, up 36% from 1.51 million units in the same period a year ago. Tractor retail sales were 64,433 units, up 3% from 62,507 units in the same period a year ago.

 

These robust vehicle sales are also linked to festive spending, which may actually come in handy for the economy as government spending, which has fuelled growth in the post-pandemic years, has been lower this fiscal so far. This has already impacted the GDP print for Apr-Jun. On the other hand, private consumption has been a pain point for the government, which seems to be reviving, as per the report.

 

"Owing to strong domestic demand, India’s merchandise imports grew by 5.8% on year during Apr-Oct. This increase is largely due to a rise in non-oil, non-gold imports, which reached $275.6 billion compared to $264.6 billion during the same period last year, indicating a rebound in domestic consumption despite the inflationary impact," the ministry said. 

 

Consumption demand, especially from rural households, is under focus this year as weak rural demand in FY24 had dented consumption demand during the year. The report said that the agriculture sector, which has been growing at a tepid pace, will strengthen with a "bumper kharif harvest" and "higher minimum support prices announcements on major rabi crops". In Apr-Jun, agriculture sector growth stood at just 2.0% and in Jan-Mar, it was a paltry 0.6%. 

 

India's food grain output during the kharif season is estimated at a record 164.7 million tonnes due to good production of rice, jowar, and maize, according to the first advance estimate for 2024-25 (Jul-Jun) released by the government on Nov. 5. The food grain output was 155.8 million tonnes during the kharif season last year. The Ministry of Consumer Affairs, Food and Public Distribution has said preliminary reports showed the sowing of rabi crops such as chana, masur, urad, and moong, which was delayed initially across some states due to prolonged rains, is now recovering. 

 

On external risks, the ministry said that rising protectionism may also hamper growth. This assumes significance as, besides the European Union's "arbitrary" Carbon Border Adjustment Mechanism, or carbon tax, the Indian government now has to navigate global trade dynamics after the election of Donald Trump as the US president. Trump's proposed protectionist policies have left investors fearing outflows from emerging markets. His tariff policies in fact could lead to retaliatory tariff impositions by competing economies, in which case, India may have to readjust its trade relationships. 

 

Carbon tax was already posing risks to the profitability of Indian exporters, as Europe is among the top export destinations for the country. India's total trade with the EU was $137.41 bln in 2023-24 (Apr-Mar), with imports at $61.48 bln and exports at $75.93 bln. Under carbon tax, those exporting goods to the EU have to report the carbon content of the commodity, based on which they would be taxed. The carbon tax collection is expected to begin from 2026.

 

The ministry also said that geopolitical conditions remain fragile with at least two simultaneously ongoing wars--Russia-Ukraine and Israel-Iran--for over a year now.

 

Amidst these external conditions, the ministry said that India's export recovery may face challenges due to softening demand in developed markets. This comes as a big negative as India's merchandise trade deficit had just improved, narrowing to $27.14 billion in October from $30.43 billion a year ago, thanks to a sharp increase in exports even as imports rose to an all-time high. Goods exports rose 17.3% on year to a five-month high of $39.20 billion in October. At 17.3%, the year-on-year rise in exports was the highest in 28 months.  End

 

US$1 = INR 84.29

 

Reported by Priyasmita Dutta

Edited by Ashish Shirke and Vandana Hinograni

 

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