July Economic Review: India’s economic resilience amidst monsoon challenges

India’s economic landscape remains robust despite the unpredictability of this year’s monsoon, according to the Union Finance Ministry’s July review, released on August 22. The report offers a detailed assessment of the country’s economic trajectory, providing insights into growth projections, inflation trends, fiscal discipline, and emerging sectoral opportunities.

Economic growth and inflation outlook

The Ministry reaffirmed the earlier projection of a real GDP growth rate between 6.5 and 7.0 percent for the fiscal year 2024-25, as forecasted in the Economic Survey 2023-24. This projection, considered realistic by financial experts, underscores India’s potential to maintain its growth momentum even amidst global economic uncertainties.

A significant development highlighted in the review is the easing of retail inflation, measured by the Consumer Price Index-Combined (CPI-C). Inflation dropped from 5.1 percent in June 2024 to a mere 3.5 percent in July 2024, marking the lowest rate since September 2019. This decrease was primarily driven by a notable reduction in food inflation, which fell sharply from 9.4 percent to 5.4 percent over the same period.

Looking ahead, the Ministry remains optimistic that food inflation will continue to ease, supported by favourable monsoon conditions that have bolstered kharif crop sowing. This positive trend, coupled with moderate core inflation, presents a favourable outlook for overall inflation, which the Reserve Bank of India (RBI) projects to average 4.5 percent for FY25.

Agricultural activity and fiscal health

Agricultural activity has been notably supported by the steady progress of the southwest monsoon, with cumulative rainfall up to August 19, 2024, exceeding the long-period average by 3 percent. This has provided a crucial boost to the agricultural sector, mitigating concerns about potential monsoon-related disruptions.

On the fiscal front, the review outlines a commitment to fiscal discipline, with the fiscal deficit expected to decline from 5.6 percent of GDP in FY24 to 4.9 percent in FY25. This disciplined approach is anticipated to stabilise bond yields and reduce borrowing costs across the economy, further strengthening India’s financial foundation.

Gross tax revenue is projected to increase by 10.8 percent in FY25, bolstered by significant gains in corporate income tax and other non-corporate tax revenues. The Union Government’s net tax revenue is expected to rise by 10.9 percent year-on-year, reflecting the resilience of India’s tax base even amidst broader economic challenges.

Sectoral growth and investment inflows

The first quarter of FY25 witnessed robust revenue generation, particularly through direct and indirect taxes, with corporate and personal income taxes growing by an impressive 39.9 percent year-on-year as of June 2024. However, capital and total expenditure saw a decline of 35 percent and 7.7 percent, respectively, primarily due to the general election period. These expenditures are expected to pick up in the latter half of the year as the government ramps up its capital outlay.

In a promising sign for India’s financial markets, Foreign Portfolio Investors (FPIs) turned net buyers in June and July 2024, with net inflows of USD 10.8 billion after earlier outflows. The debt market, in particular, is poised to attract significant investment, with the incorporation of Indian Government Bonds into JP Morgan’s Emerging Markets global bond index expected to draw $20-40 billion within the next 18-21 months.

Global trade and tourism recovery

The Ministry also pointed to emerging global trends, including the potential for interest rate cuts in the US and a weakening US dollar, which could provide a boost to global trade. However, the outlook remains tempered by ongoing geopolitical tensions and rising shipping costs, as noted by UNCTAD.

Closer to home, India’s travel and tourism sector has made a full recovery from the pre-pandemic era, with its contribution to GDP reaching Rs 19.3 lakh crore in 2023—a nearly 10 percent increase from pre-pandemic levels. This sector’s resurgence is a testament to India’s broader economic resilience.

The July Economic Review paints a picture of an economy that, while facing challenges, is well-positioned to navigate them successfully. With prudent fiscal management, a positive inflation outlook, and sustained sectoral growth, India is poised to maintain its economic momentum in the months ahead. The commitment to fiscal discipline and the robust performance of key sectors provides a strong foundation for continued growth, despite the uncertainties of the global economic landscape.