According to the July edition of its Monthly Economic Review, the ministry predicts that growth will be propelled by ongoing domestic consumption and investment demand. The increased allocation for government capital expenditure in the present fiscal year is causing private investment to converge.
On Tuesday, the finance ministry stated that the inflation observed in food items is anticipated to be temporary due to proactive government interventions and the introduction of new crops, which will mitigate price levels. However, despite these actions, persistent global uncertainties and internal disturbances could maintain heightened inflationary pressures in the upcoming months.
Outlined in its Monthly Economic Review for July, the ministry indicated that moving ahead, the momentum for growth will be sustained by ongoing domestic consumption and investment demand. Notably, the increased allocation for government capital expenditure in the ongoing fiscal year is now resulting in a scenario where private investment is becoming more concentrated.
In July 2023, the consumer price index-based retail inflation experienced a notable upswing, reaching a 15-month peak of 7.44 percent. This surge was predominantly propelled by specific food items. In contrast, core inflation remained at a 39-month low, standing at 4.9 percent.
Cereals, pulses, and vegetables witnessed a significant double-digit growth in July when compared to the same period in the previous year. The disruption in domestic production further exacerbated the inflationary pressures. Factors such as the disruption in the tomato supply chain due to the white fly disease outbreak in Karnataka's Kolar district, along with the rapid onset of the monsoon in northern India, contributed to a sharp increase in tomato prices. Additionally, the price of tur dal soared due to inadequate production during the kharif season of 2022-23, as highlighted by the ministry.
"The government has proactively implemented measures to curb food inflation, and coupled with the influx of fresh supplies, it is anticipated that market price pressures will ease in the near future. The report emphasizes that the inflationary impact on food products is temporary in nature. However, the report acknowledges that due to global uncertainties and disruptions within the country, inflationary pressures could remain elevated in the upcoming months. This underscores the need for increased vigilance by both the government and the RBI.
While the July food inflation ranks among the top three since the initiation of the new CPI series in 2014, only 48 percent of food items exhibit inflation rates exceeding 6 percent. This percentage includes 14 food items experiencing double-digit inflation.
Particular items like tomatoes, green chillies, ginger, and garlic have witnessed inflation rates surpassing 50 percent. Consequently, the notable price surge in specific items has driven the elevated food inflation observed in July 2023."
"The Ministry conveyed that tomato prices are anticipated to decrease as fresh stocks arrive, likely by the end of August or early September. Additionally, increased imports of tur dal are projected to temper the inflation in pulses. Taking into account these aspects along with recent government initiatives, a reduction in food inflation is foreseeable in the forthcoming months."
"The surge in cereal prices was driven by Russia's decision to terminate the Black Sea Grain deal, coupled with dry conditions prevailing in key wheat-growing regions. Within India, internal factors such as the white fly disease and irregular distribution of monsoon contributed to the upward pressure on vegetable prices."
"In its most recent meeting, the Reserve Bank of India's committee responsible for setting interest rates opted to maintain current policy rates, while maintaining a focus on gradually retracting accommodative measures to ensure inflation progressively aligns with the target while still supporting economic growth."
"The Monetary Policy Committee (MPC) of the RBI anticipates a corrective trend in vegetable prices in the impending months. However, it highlighted the presence of uncertainties regarding domestic food price trends due to abrupt weather events, potential El Niño conditions in August and beyond, and the upward trajectory of global food prices. In light of these factors, the MPC revised its inflation projection for the ongoing fiscal year from 5.1 percent to 5.4 percent."
Up until August 18, 2023, the cumulative rainfall for this year's southwest monsoon season has exhibited a deficiency of approximately 6 percent compared to the long-term average. By the same date, farmers have cultivated across 102.3 million hectares, mirroring the corresponding period's levels from the previous year and reflecting a 1.1 percent increase over the average of the last five years.
According to the monthly report provided by the Department of Economic Affairs within the finance ministry, the agricultural sector is gaining momentum, driven by notable progress in both the monsoon and kharif sowing. The procurement of wheat and rice has also shown substantial improvement, leading to a bolstering of food grain buffer stocks aimed at ensuring national food security.
Addressing investment, the report underscores the government's persistent focus on capital expenditure, which is anticipated to be a driving force behind growth in the forthcoming years. Notably, the Union government increased the capital outlay by 33.3 percent in the FY24 budget, resulting in a rise in the proportion of capital expenditure within the total expenditure from 12.3 percent in 2017-18 to 22.4 percent in the budget estimate for 2023-24.
The actions taken by the Union government have additionally encouraged states to elevate their capital expenditure (capex) disbursements. During the first quarter of FY24, states experienced a substantial year-on-year increase of 74.3 percent in their capital expenditure, which complemented the Centre's corresponding capex surge of 59.1 percent.
The report highlighted that the augmented allocation for government capital expenditure is presently fostering an environment that draws in private investment. This trend is observable in the performance of multiple high-frequency indicators and industry analyses, which underscore the emergence of initial signs of an upswing in private capex.
The monthly assessment also noted the necessity of overseeing the external sector to enhance its outlook in light of the ongoing global drive for industrial policies. Services exports are maintaining a positive trajectory and are projected to persist in this manner, buoyed by the persistent preference for remote work, as evidenced by the increasing prevalence of global capability centers.
Simultaneously, it is essential to maintain vigilance over the potential repercussions of emerging technologies like Artificial Intelligence on the future demand for Indian services exports, as well as the subsequent influence on employment. This long-term consideration is crucial to understanding the broader impact.
