Global Economy Faces Uncertainty While India’s Resilience Shines in FY 2024-25

The financial year (FY) 2024 – 2025 commenced ushering a new hope, with the global economic outlook remains beset by multiple headwinds: inflation persisting above target; elevated public debt in major economies and their repercussions on the global economy in the case of disorderly adjustments; financial stability risks from the higher interest rates scenario; protracted geopolitical tensions; inefficiencies from geoeconomics fragmentation; and accentuated climate shocks.

The global economy is projected to grow by 3.2 per cent in 2025, the same pace as in the preceding years. Growth in the advanced economy’s (AEs) at 1.7 % in 2025 is projected to be marginally higher than that of 1.6 per cent a year ago. Emerging market and developing economies (EMDEs) are projected to expand at 4.2%, which is below the 4.3% a year ago.

Aided by restrictive monetary policy stances, and lower international commodity prices, global inflation is projected to decline from 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025. The last mile of disinflation is, however, apprehended to be challenging, as stated earlier.

Recurrent supply shocks arising out of adverse climate events, and geopolitical hostilities pose a significant risk to the disinflation process. Central banks in major Advanced Economy’s (AEs) expect inflation to approach targets gradually and have accordingly indicated rate cuts at the beginning of this year. Upward inflation in the recent periods is, however, leading to a continuous repricing in market expectations and generating significant volatility in key financial market segments – currency, bonds and equities. Elevated financial market volatility (EFMV) and swings in capital flows add to macroeconomic and financial stability challenges faced by Emerging market and developing economies (EMDEs).

However, Global trade volume (goods and services) is expected to recover with a growth of 3.0% in 2024 from 0.3% in 2023, and subsequently 3.3% in 2025, with easing inflation and the expected rebound in goods trade. The expected rise in global trade in 2024 – 2025 will however remain gloom in comparison to the 4.9% boost achieved during the period of 2000 – 2019.

It is of omnipotence importance that higher levels of public debt in major AEs and EMEs and their explosive trajectories are raising concerns around the sustainability of public finances in these economies and run the risk of adding to the already heightened financial market volatility.

Elevated public debt levels can lead to the escalation in risk premia and sovereign bond yields, which can then spillover to other financial market segments. The resulting retrenchment in capital flows could hamper the already subdued global growth. These potential disruptive dynamics call for credible fiscal consolidation plans in the affected countries to ensure stable global macroeconomic and financial environment. In the medium to long-term, climate change, cyber security, crypto currency, FinTech, CBDC and tech disruptions through AI/machine learning (ML), also require coordinated policy efforts at the global level.

Indian Economy:

Indian economy is navigating the drag from an adverse global macroeconomic and financial constraints with GDP growth is robust on the back of solid investment demand which is supported by healthy balance sheets of banks and corporates, the government’s focus on capital expenditure and prudent monetary, regulatory and fiscal policies.

• The prospects for agriculture and rural activity appear favourable due to the ebbing El Nino and the expected above normal southwest monsoon. The expansion of environmentally sustainable nano diammonium phosphate (DAP) in all agro-climatic zones and the promotion of bio-economy through a new bio-manufacturing and bio-foundry scheme in the interim Union Budget 2024-25 would also support the agriculture sector.

• The Union Budget 2024-25, with an allocation of ₹6,903 crore for semi-conductor and display fabs, would contribute to making India a global hub for chip and electronics manufacturing. Investments under the production-linked incentive (PLI) scheme are likely to gain further momentum going forward. These factors are expected to create new employment opportunities, improve labour incomes and strengthen domestic demand. Taking into account these factors, real GDP growth for 2024-25 is projected at 7.0 per cent with risks evenly balanced.

• the National Quantum Mission (NQM), approved at a total cost of around ₹6,000 crore (2023-24 to 2030-31), would scale up scientific and industrial research and development (R&D) and innovative ecosystem in quantum technology (QT). It would propel national priorities like Digital India, Make in India, Skill India and Stand-up India, Start-up India, Self-reliant India and sustainable development goals (SDGs). All these initiatives, along with government-led investment in the infrastructure sector and increasing adoption of digital technologies, are likely to boost productivity and potential growth in the medium-term.

• The increasing incidence of climate shocks, however, imparts considerable uncertainty to the food inflation and overall inflation outlook. Low reservoir levels, especially in the southern states and the outlook of above normal temperatures during the initial months of 2024-25 need close monitoring. The volatility in international crude oil prices, the persisting geopolitical tensions and elevated global financial market volatility also pose upward risk to the inflation trajectory. Taking into account these factors, CPI inflation for 2024-25 is projected at 4.5 per cent with risks evenly balanced.

• As the path of disinflation needs to be sustained till inflation reaches the 4 per cent target on a durable basis, the MPC in its April 2024 meeting, kept the policy repo rate unchanged at 6.50 per cent and noted that monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission.

• The central government extended the financial assistance scheme for states’ capital expenditure to 2024-25 with an outlay of ₹1.3 lakh crore. The budgeted reduction in gross market borrowings from 5.3 per cent of GDP in 2023-24 (RE) to 4.3 per cent of GDP in 2024-25 (BE) will enhance the flow of funds to the private sector and support private investment. The digitalisation of the tax system has enhanced tax collections, with the Centre’s direct tax revenues budgeted to reach 6.7 per cent of GDP in 2024-25, the highest in three decades.

• The Reserve Bank strives to expand the scope of ongoing pilots in e₹-R and e₹-W in 2024 -2025 by incorporating various use cases as well as new designs, technological considerations and more participants, besides launching a full-scale public tech platform with more financial institutions/data service providers and product offerings.

Courtesy: Reserve Bank of India

Team Maverick