Renewed risks – RBI sticks to 6.5% GDP growth projection for the year, but new uncertainties emerge | 27 October 2023 | UPSC Daily Editorial Analysis

What's the article about?

• It talks about the present status of the Indian Economy and chaalenges therein.

Relevance:

• GS3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment

Context:

• On October 6, the Reserve Bank of India (RBI) retained its GDP growth projection for the year at 6.5%, with evenly balanced risks from geopolitical tensions, economic fragmentation, volatile financial markets, and an uneven monsoon.
• However, new uncertainties have emerged since then, including the Israel-Hamas conflict, rising U.S. bond yields, mixed data points, and signals from central banks around the world.
• This article analyzes the RBI's outlook for the Indian economy and the Finance Ministry's response to the latest global storm.

Analysis:

• RBI's outlook for the Indian economy:
  • The RBI Governor has signaled that new uncertainties have emerged since the last monetary policy review.
  • The Israel-Hamas conflict has widened, and Finance Minister Nirmala Sitharaman has flagged worries about implications on global food, fuel, and fertilizer supplies.
  • Given India's dependence on fuel and fertilizer imports, disruptions or price spikes could hurt the macro-economic framework, even if the government refrains from passing on higher prices to consumers and farmers in the election season.
  • The RBI chief also pointed to rising U.S. bond yields, which hit a 16-year high of 5% this week, mixed data points, and signals from central banks around the world as the new unknowns.
  • A glimpse of this anxiety was visible this week, with the sharpest sell-off on Indian bourses since July.
• Finance Ministry's response to the latest global storm:
  • The Finance Ministry acknowledges that global uncertainties have compounded but seems largely sanguine for now in its outlook for the economy.
  • Its monthly economic review released on Monday asserts that growth “remains on track,” inflation is easing after a “temporary” seasonal surge in July-August, consumption demand is strengthening, and investment demand is “also firming up”.
  • On the “imminent fears” of rising crude oil prices, it noted that July-September quarter prices were still “way lower” than the averages in the first and second quarter of 2022-23.
  • The weak foreign trade picture is expected to recover, and industrial job creation prospects are high for the next two quarters, while higher demand for housing and vehicle loans reflects bolstered confidence levels in households.
  • However, the article suggests that there is still much to be done to correct an uneven recovery, which would eventually hamper a broader investment revival.

Way Forward:

• Both the RBI and the Finance Ministry must take appropriate steps to ensure that the Indian economy stays on a higher growth trajectory despite these looming threats.