Domestic demand to lay foundation for capex cycle despite global risks, finance ministry says

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Domestic demand will aid India’s economy and help lay the foundation for the capex cycle, despite global headwinds that pose a downside risk to growth, the federal finance ministry said in its monthly economic review.

“There are downside risks to growth and upside risks to inflation, partly channeled through the external sector and partly originating from weather uncertainties,” the finance ministry said. “Yet a strong point going India’s way is the strength of its domestic demand. Consumption has shown steady and broad-based growth, while investment in capacity creation and real estate is finding traction.”

Strong economic activity witnessed recently, including investment activity despite higher interest rates, underscores the strength of demand in the economy.

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As inflation further recedes, demand will become stronger and lay the foundation of a virtuous capex upcycle, the ministry said.

The world’s most populous country has had a good beginning for the fiscal year in April, a harbinger of positive outcomes, it added.

What's working?

Goods and services tax collections in April rose to a record, pushed up by the widening of the tax base and heightened economic activity. The Index of Industrial Production and Eight Core Industries Index averaged steady growth in the final quarter of the last fiscal year, adding to the capacity utilisation hovering close to 75 percent two quarters earlier, the finance ministry said.

Air passenger traffic has moved beyond pre-pandemic levels, and PMI Manufacturing was at a four-month high in April, while PMI Services expanded at the fastest pace in 13 years.

“Buoyed by sustainable growth in activity, increasing capacity utilisation to investment triggering 75 percent, the corporates have started investing in new capacity,” the finance ministry said.

Meanwhile, the forecast of a normal monsoon, surplus water reservoir levels, adequate availability of seeds and fertilisers, and robust tractor sales augurs well for a healthy kharif sowing season.

Rural demand is also gaining momentum, as evident in sturdy sales of fast-moving consumer goods companies during the previous quarter and sustained double-digit growth of two and three-wheelers sales in April.

“Going forward, healthy prospects for the kharif season, higher minimum support prices for crops, and increased budgetary spending by the government are likely to enhance farmers’ income and boost the rural economy,” the ministry said.

Waning inflation

Globally, inflationary pressures are waning, leading to an easing of domestic inflationary pressures.

Wholesale inflation has declined to a 33-month low of -0.9 percent in April, after remaining in double digits for 18 months.

Retail inflation has also declined from a peak of 7.8 percent in April last year to an 18-month low of 4.7 percent in April 2023.

Still, the external sector and weather uncertainties post downside risks to growth and upside risks to inflation, the finance ministry said.