Status of Indian economy(April, 2024)

Status of Indian economy(April, 2024)


Why in the news?

According to the Asian Development Bank (ADB), India’s economic outlook remains strong for the upcoming two years. Despite an anticipated deceleration in headline growth, with Gross Domestic Product (GDP) slowing from 7.6% in the fiscal year 2023-24 to 7% in the current fiscal year, the economy is projected to rebound, reaching 7.2% growth in 2025-26.


Current status of Indian economy 

GDP growth rate- Asian Development Bank has  anticipated strong economic expansion will be fueled by significant investment demand from both the public and private sectors, alongside a steady uptick in consumer spending. Nonetheless, the growth forecast for the fiscal year 2024-25 falls short of the 7.6% projection recorded for 2022-23.

Inflation trend-As per its Asia Development Outlook report, retail inflation will ease to 4.6% this year and 4.5% in 2025-26. India’s “persistent” food inflation is expected to drop to 5.7% as farm output returns to normal trends this year.

U.S. rate hike impact-The Asian Development Bank (ADB) observed that the recent uptick in inflation reported by the United States in March has cast doubt on the likelihood of anticipated interest rate reductions from the Federal Reserve. Consequently, the ADB acknowledged that an extended period of elevated interest rates could influence inflation trends across Asia, albeit with a moderated effect on economic growth.

Increased consumer demand-Increased incomes are anticipated to drive up consumer demand, particularly in urban areas where confidence levels among consumers have seen a boost. The Asian Development Bank (ADB) foresees a rise in demand from urban centers, caused by declining inflation rates and a gradual enhancement in the labor markets of cities..

Foreign Direct Investment- The report suggested that foreign direct investment (FDI) inflows are expected to stay subdued in the short run owing to stringent global financial circumstances. However, an upswing is anticipated in 2025-26, driven by increased investment in industry and infrastructure.

A positive monsoon outlook-An anticipated return to normal monsoon patterns this year is expected to rejuvenate rural consumption. Last year, erratic rainfall adversely impacted the farm sector, leading to subdued rural spending. The surge in demand for employment opportunities under the Mahatma Gandhi National Rural Employment Guarantee Act scheme underscores the strain caused by these conditions.

Risk highlighted by ADB

The report highlighted that, exports are anticipated to remain subdued this year due to sluggish growth in major advanced economies, they are forecasted to rebound in 2025-26.

Regarding foreign direct investment (FDI), the report suggested a muted outlook in the near term due to tight global financial conditions, but expects an upswing by 2025-26, driven by increased investment in industry and infrastructure.

Highlighting the importance of price and financial market stability for consumer and business confidence, the ADB underscored that its projections face downside risks from global shocks, such as a surge in crude oil and energy prices leading to higher global inflation and tighter financial conditions. Domestically, there’s a risk of underperformance in agriculture due to weather shocks, potentially affecting demand and inflation.

Impact of U.S. rate hike On India

The impact of a rate hike by the United States Federal Reserve on the Indian       economy can be multifaceted:

  • Capital Outflows: A rate hike in the US typically leads to higher returns on dollar-denominated assets, attracting investors away from emerging markets like India. This could result in capital outflows from India, putting pressure on the domestic currency and potentially leading to depreciation of the Indian rupee.
  • Borrowing Costs: Indian companies that have borrowed in dollars may face higher interest payments as US interest rates rise. This can increase their financial burden and affect profitability, particularly for firms with significant dollar-denominated debt.
  • Foreign Exchange Reserves: The Reserve Bank of India (RBI) may need to utilize its foreign exchange reserves to stabilize the currency if there is excessive volatility due to capital outflows. Depleting reserves can reduce India’s ability to intervene in currency markets and could impact investor confidence.
  • Inflation: A weaker rupee can lead to higher import costs, potentially increasing inflationary pressures in the Indian economy. This could prompt the RBI to tighten monetary policy to control inflation, which may further dampen economic growth.
  • Trade Balance: A depreciating rupee may improve India’s export competitiveness in the short term, but it could also make imports more expensive, widening the trade deficit.
  • Foreign Investment: A rate hike in the US could make investments in US assets more attractive relative to Indian assets. This may lead to a slowdown in foreign direct investment (FDI) and foreign institutional investment (FII) inflows into India.

On the positive side, the ADB identified faster-than-expected FDI inflows, especially into manufacturing, as an upside risk that could enhance output and productivity. Additionally, better-than-expected global growth could bolster exports and overall economic growth.

Download plutus ias current affairs eng med 12th April 2024


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