India needs to factor in risks to growth from uncertain US inflation, dollar outlook: CEA Nageswaran

Chief Economic Advisor V Anantha Nageswaran

India needs to contend with risks to its growth trajectory emanating from a combination of loose financial conditions and the uncertain outlook for interest rates and dollar in the United States, Chief Economic Advisor V Anantha Nageswaran said on May 18.

While lauding the progress made on capital expenditure and stabilisation of the goods and services tax regime, among others, Nageswaran said that this has raised India's GDP growth potential to 7 percent compared to the past decade.

However, he said that India needs to take steps to sustain high levels of growth at a time when "geopolitical risks are much, much higher."

These risks include, a slowdown in global trade and geopolitical uncertainty.

"Global financial stability is an important risk factor we have to face in the coming years. It is a risk factor that has not yet played out which we need to factor in given our own state of market valuation in India," he added.

US inflation rose less-than-expected in April 2024 rising 0.3 per cent sequentially, according to data released by the Labor Department's Bureau of Labor Statistics on May 15.This sparked expectations for a September interest rate cut by the US Federal Reserve.

However, some economists feel that the US is unlikely to react to a single favourable print and may wait for sustained easing in inflation before considering a cut in interest rates.

While, on the other hand, the rupee has been under pressure of late due to a flurry of factors. While improved odds of Fed rate cuts sparked a rally in most Asian currencies, the rupee remains on the sidelines due to strong dollar demand from local oil companies and foreign banks, as per a Reuters report on May 16.

Earlier this month, Nageswaran said that signs from the first three quarters of financial year 2023-24 pointed towards an 8 percent economic growth rate for the full year.

In its second advance estimate of GDP for 2023-24, India's statistics ministry pegged the previous year's growth rate at 7.6 percent, 30 basis points higher than its first advance estimate of 7.3 percent.

Nageswaran also spoke on the issue of the world looking to decouple from China by finding alternatives.

The top advisor said, "it is very easy to talk of decoupling from China, but all the major manufacturers in the world source at least 2 percent of their industrial input from China, decoupling would be difficult," adding that India is taking steps, including striking free trade deals with the likes of Australia to reduce import dependency on Beijing.

However, India cannot reduce import dependency on a manufacturing giant like China overnight and needs to find ways to resolve it, he added.