Demand will strengthen, to spur investment cycle as inflation recedes: FinMin

The Finance Ministry of India reports that the first month of the 2023-24 fiscal year has witnessed robust economic activity with a positive outlook for strengthening demand. Despite higher interest rates, signs of a virtuous investment cycle are already evident. The ministry highlights steady consumption growth, traction in capacity creation and real estate investment, and anticipates a stronger demand as inflation recedes. While downside risks exist, the ministry expects prices of commodities, except precious metals, to moderate and predicts enhanced rural economy due to higher crop support prices and government spending

The first month of 2023-24 has seen strong, albeit seasonally moderated economic activity, and demand is expected to strengthen in the wake of receding inflation, fuelling a virtuous investment cycle whose signs are already visible despite higher interest rates, the Finance Ministry said on Monday.

“There are downside risks to growth and upside risks to inflation, partly channelled through the external sector and partly originating from weather uncertainties. Yet a strong point going India’s way is the strength of its domestic demand,” the ministry said in its monthly economic review of April.

“Consumption has shown steady and broad-based growth, while investment in capacity creation and real estate is finding traction… As inflation further recedes, demand will become stronger and lay the foundation of a virtuous capex upcycle,” it emphasised, while conceding it is too early to forecast the entire year’s outcomes. 

“A good beginning, though, is a harbinger of positive outcomes,” the review said, adding that crops are unlikely to suffer despite uncertainties about the monsoon as reservoir levels are healthy. 

The ministry expects prices of all commodities except precious metals, to moderate this year, though they would stay well above pre-pandemic levels. 

“Going forward, several factors, such as weaker than expected oil supply, higher than anticipated demand from China, intensification of geo-political tension and unfavourable weather conditions, may pose an upside risk to these forecasts. Prices of commodities sensitive to El Niño effects, such as coffee, rice, palm oil, and natural rubber, need to be continuously monitored,” it cautioned. 

Higher crop support prices, healthy prospects for the Kharif season and government spending will likely enhance farmers’ incomes and boost the rural economy, the ministry averred, noting that demand indicators are gaining momentum as seen in two- and three-wheeler sales in April and a rapid uptick in consumer non-durables’ sales in the last quarter of 2022-23.