Economic & Finance

Factors which are behind India’s economic growth as per Finance Ministry

factors which are behind India's economic growth

Report which has been released Thursday exhibited that global economic growth landscape continues to see gradual resurgence. This is being supported by fading of recession fears along with rebounding of growth in major economies. There are 3 factors which are behind India’s economic growth as per Finance Ministry. These include resilient growth, price stability, along with steady external sector outlook. 

As per the report, geopolitical tensions are still the critical risks. It exhibited that risk perceptions softened, providing a potential growth upside. Even though there have been global challenges, India demonstrated its strong economic performance. This has highlighted broad-based growth throughout sectors and asserted an important role in helping global growth trajectory. 

Main highlights of the report

The factors which are behind India’s economic growth were supported helpful government policies, favourable central bank decisions and improved business confidence. 

However, the global slowdown resulted in moderation in the country’s merchandise exports and imports. Slowing of trade led to merchandise trade deficit narrowing in FY23-24, with exports showing smaller contraction than imports. 

That being said, non-petroleum and non-gems & jewellery merchandise exports demonstrated resilience with continued uptick over previous few months, growing at ~3% in FY24. Services exports saw an expansion at fastest pace in FY24, helped by increasing software exports and business services exports. 

Because of such developments, the report added that the country’s current account deficit saw an improvement in first 9 months of FY23-24 against corresponding period of prior year. India’s capital inflows saw strong turnaround in 2023-24, and the country’s foreign exchange reserves touched all-time high in March 2024 month. 

Experts believe that this is sufficient to cover 11 months of projected imports along with over ~100% of total external debt. The 3 factors which are behind India’s economic growth are expected to sustain for FY24 too as per experts. 

Trend in inflation

As per Department of External Affairs, government’s efforts focused on managing retail inflation in FY24 were successful. Inflation, which is measured by Consumer Price Index, saw a fall from 6.7% in FY23 to 5.4% in FY24. This is within upper tolerance level of inflation-targeting framework. 

Indian government’s positive action provided support to the inflation control, like reduction in petrol, diesel and LPG prices. 

FY24 closed with inflation rate of ~4.85% in March 2024. This was the lowest inflation rate seen by the economy over the previous 10 months. Core inflation, excluding food, fuel & light, fell to ~3.3% in March. This was lowest in this financial year. 

Miscellaneous group inflation, that broadly indicates price change for services, slightly declined to ~3.5% in March, the lowest over previous 10 months. 

‘Fuel and light’ segment remained in negative territory, declining further in March. This exhibits cut in petrol, diesel and LPG prices. 

India’s current account deficit

Current account deficit (CAD) narrowed to ~1.2% of GDP in 3Q FY 2023-24, from ~1.3% in preceding quarter and ~2% in corresponding period of prior year. 

Apart from this, trailing 4 quarters CAD to GDP ratio was ~0.93% in 3Q of FY23-24 against ~2.4% in corresponding period of prior year. Services exports went up by ~5.2% in 3Q FY23-24 in comparison to a growth of ~4.2% in previous quarter. 

Structural change in composition of services exports provided a fillip to external sector. Software exports increased and non-software exports, led by business services, also increasing at the same time.

Going forward, the country’s trade deficit might decline further decline as and when PLI scheme deepens coverage and extends to several other sectors. 

Further, recently signed India-European Free Trade Agreement (EFTA) should increase global market share of India’s exports and decrease India’s import dependence. A range of international agencies and RBI believe that CAD to GDP will moderate to below 1%. This is expected to be supported by growing merchandise & services exports and resilient remittances. 

Trend in Capital Inflows

As per Department of External Affairs, India’s FPI flows saw strong turnaround in FY23-24. The country as a whole saw strong FPI inflows in FY23-24 as a result of rising economic growth, favourable business environment, and healthy macroeconomic fundamentals. 

Net FPI inflows came in at ~USD 41 billion during FY23-24 against net outflows over preceding 2 years. This was second-highest level of FPI inflow which was seen post FY14-15. 

India received highest equity inflows among the categories of emerging market peers during FY23-24. Imminent inclusion of country’s sovereign bonds in global bond indices should further help demand for exposure to India.

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