A promising reprieve for food prices is anticipated, as the India Meteorological Department (IMD) signals above-average rainfall for the upcoming monsoon season, according to the latest monthly economic review by the Ministry of Finance, disclosed this past Thursday. This prediction of plenteous rains brings hope in the face of persistent high food inflation, which is an issue plaguing numerous leading economies around the globe. In its recent report, the Reserve Bank of India (RBI) underscored the unpredictability of food prices as a potential weight on the country’s inflation outlook.
In the Indian scenario, food inflation took a slight dip from 8.7 percent in February to 8.5 percent in March. The inflation has been notably driven by certain food items such as vegetables and pulses. Therefore, the possibility of a decrease in food prices is anticipated, as the IMD’s forecast of generous monsoon rains could lead to heightened agricultural yields, provided that the rainfall is evenly distributed both geographically and temporally.
Simultaneously, retail inflation in the fiscal year 2024 has observed a meaningful reduction, touching the lowest levels since the Covid-19 pandemic started, with core inflation dwindling to 3.3 percent in March 2024. While acknowledging some moderation, the RBI has expressed concerns in its recent ‘State of the Economy’ release, suggesting food inflation remains elevated and continues to be a source of risk.
Adding to the complexities of inflation are the risks of unpredictable weather patterns and sustained geopolitical disputes which could propagate the volatility in crude oil prices and consequently threaten to disturb inflation rates in the near term.
From an economic perspective, the Ministry highlighted India’s robust performance in terms of economic growth. Factors propelling this strong performance include healthy domestic demand, a revival in rural demand, dynamic investment levels, and a consistent manufacturing upswing. Globally, while fears of a recession are on the wane and some economies are showing signs of recovery, other areas still suffer from sluggish economic activity. Geopolitical tensions, albeit slightly less acute than before, continue to generate uncertainty in the global economic landscape.
Despite global disturbances creating headwinds, India’s economic indicators signify stability and resilience, reinforcing the nation’s economic prowess despite unsettled global conditions.
During the fiscal year, global slowdowns and geopolitical strains made the country’s merchandise exports contract for four consecutive quarters. Despite these contractions, the merchandise trade deficit narrowed in FY24 due to exports reducing less drastically than imports. Moreover, as of the third quarter of FY24, there appears to be a trend reversal with merchandise exports seeing an incline.
In particular, the rise in exports in FY24 has been substantially serviced by an increase in electronic and engineering goods. The ministry noted that the electronics sector, despite a slump in global trade, is taking a significant place in India’s export mix, with electronic goods constituting 6.7 percent of total exports in FY24.
In the non-petroleum, non-gems, and jewellery segments, merchandise exports have demonstrated resilience with a continued rise over the recent months. Contrasting this robustness, imports – other than oil – exhibited some weakness, specifically in non-oil-non-gold segments, with notable declines seen in capital goods, chemicals, and coal. Interestingly, gold and electronics imports have trended upward.
Further growth was recorded in the services exports sector, which increased by 5.2 percent in Q3 FY24, a modest improvement compared to the previous quarter’s growth of 4.2 percent. A structural shift in the composition of services exports has lent buoyancy to the external sector, with a distinct uptick in software exports and concurrent growth in non-software exports, particularly those related to business services.
Looking ahead, there is optimism that India’s trade deficit might shrink further as the scope of the Production Linked Incentive (PLI) scheme expands to encompass additional sectors. The Ministry also called attention to recent trade agreements, such as the signed India-European Free Trade Agreement (EFTA), projecting that it will amplify India’s global export market share and simultaneously cut down the nation’s reliance on imports.
