Informist, Thursday, Sep 26, 2024

--Fin min: Data till Aug fits well with 6.5-7.0% growth forecast FY25
--Fin min:Apr-Jun GDP fits well with FY25 growth forecast of 6.5-7.0%
--Fin min: Outlook for inflation trajectory is positive
--Fin min: Low oil prices a bright spot for Indian economy
--Fin min:Reasonable to expect govt spend will pick up in rest of FY25
--Fin min: Navigating continuing global uncertainty a challenge
--Fin min: Urban consumption showing some signs of weakness
--CONTEXT: Comments from fin min's Monthly Economic Report for Aug

--Fin min: Foundations of macroeconomic stability in India strong

NEW DELHI – The Union finance ministry today said low crude oil prices are a bright spot for the economy, though there are some factors that could complicate the global and domestic economic situation if they materialise. According to data from the Petroleum Planning & Analysis Cell, the price of India's crude oil basket so far in September is $73.86 per barrel, down 6% from August and 21% from September 2023.

A sharp fall in global crude oil prices in the past few weeks has eased price pressures for India and has the potential to bring down domestic inflation. The fall in crude oil prices has been due to global crude oil prices cratering on concerns about weak demand from China and an increase in production by Saudi Arabia and Libya.

The fall in crude oil prices will also aid the Reserve Bank of India's search for comfort to ease its monetary policy. The development coincides with the start of a rate-cut cycle around the world, with the US Federal Open Market Committee voting to cut the federal funds rate target range by 50 basis points to 4.75-5.00% on Sep 18, against expectations of a cut half that size. The rate cut came after the US central bank had left interest rates at an over two-decade high for 14 months – between March 2022 and July 2023 - when CPI inflation had hit multi-decade high.

"A challenge on the macroeconomic front is navigating the continuing uncertainty in global economic prospects. We will likely encounter a cycle of policy rate cuts globally, amid fears of a recession in advanced economies and continuing geopolitical conflicts," the finance ministry said in the Monthly Economic Review for August.

In fact, geopolitical concerns had complicated the global inflation outlook and pushed central banks to begin a rate hike cycle. The long-awaited moderation in interest rates is owing to the reversal of the trend.

The FOMC rate cut comes less than a month before the RBI's own interest rate decision, with the Monetary Policy Committee set to meet Oct 7-9. Most economists do not expect the Indian central bank to begin the rate-easing cycle next month. Between May 2022 and Feb 2023, the RBI raised interest rates by 250 bps to 6.50%, and has left it unchanged for nine consecutive policy meetings.

"Looking ahead, the outlook for inflation trajectory is positive as benign core inflation, a good monsoon, and healthy sowing progress of Kharif crops are likely to keep inflation under control," the ministry said.

India's annual CPI-based inflation rate remained largely unchanged at 3.65% in August from a revised July print of 3.60%. The headline print remained below the RBI's target of 4% for a second successive month after having spent nearly five years above it. However, this was mainly because of the statistical effect of a high base and a weaker month-on-month rise in food prices.

The overall index in August was flat from the previous month, while the food price index fell 0.4% from July. Core inflation, which strips out fuel and food items, remained at 3.4% for the second consecutive month in August. In July, core inflation had risen for the first time in 20 months because of an increase in telecom tariffs.

"While replenished reservoir levels and higher kharif sowing acreage augur well for the food price outlook, the effect of the skewed spatial distribution of the monsoon warrants monitoring," the ministry said. According to the India Meteorological Department, so far in the season, rainfall has been normal in 20 of the 36 subdivisions in the country. Rainfall was 'excess' in nine, and 'deficient' in five subdivisions, it said. Rainfall has been 'large excess' in two subdivisions since Jun 1.

GROWTH OUTLOOK

On growth, the ministry said data till August as well as the Apr-Jun GDP print fit well with the projection of 6.5-7% GDP growth in the current fiscal year. India's GDP growth slowed to a five-quarter low of 6.7% in Apr-Jun owing to the modest pace of government expenditure and low growth in net taxes. The Indian economy grew 8.2% a year ago and 7.8% in Jan-Mar.

India's GDP growth in the past few years has been driven primarily by government expenditure. Consumption has continued to be tepid. However, in Apr-Jun, government spending was also lower on account of the general election. "For the remaining part of the financial year, a reasonable expectation is that public expenditure will pick up, providing added growth and investment impetus," the ministry added in the report.

While the ministry said data indicates that the full financial year's GDP projection holds true--which should be a positive--there are incipient signs of strain in certain sectors. Urban consumption shows signs of weakness, evident from the decline in automobile sales in the first five months of the year compared to the previous year, it said.

According to data from the Federation of Automobile Dealers Associations, India's automobile retail sales saw modest growth on a year-on-year basis in August owing to weather-related disruptions, high inventory, and weak consumer sentiment. Dealerships sold a total of 1.89 mln vehicles in August, against 1.84 mln units in the year-ago period and 2.03 mln vehicles in July. While sales of two- and three-wheelers rose on year, volumes of passenger and commercial vehicles and tractors fell. On a sequential basis, retail sales declined across segments.

"While these may turn out to be transient with the onset of the festival season, they warrant monitoring," the ministry said. End

Reported by Priyasmita Dutta

Edited by Rajeev Pai

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