Despite the increased global risks, India’s economic activity has also stayed largely stable, with cost pressures easing and strong domestic demand likely to keep economic activity intact, the Finance Ministry’s monthly economic review released on Monday said. But the ministry highlighted that the external environment is an important factor of uncertainty, owing to the fluctuations in the global price of oil and the world economy’s gradual slowdown.
Despite prevailing difficult external conditions, the industrial sector has been resilient and manufacturing activity has continued to grow along with the gradual improvement of the technological capability in the country, the report said. It emphasized that continued initiatives in research and development, skill formation, building resiliency and supporting capabilities in the supply chain will play a key role in improving the competitiveness of industry and the economy’s capacity to absorb worldwide shocks.
Food inflation and farming production are still on a downbeat note. The report cautioned crop yields may face challenges from the negative impacts of the El Niño weather phenomenon in the later stages of flowering and grain formation in August. It may also impact on soil moisture and winter temperatures for the next rabi crops, including wheat and mustard.
“The acreage under kharif sowing has picked up pace after monsoon rains increased in intensity in major parts of the country, but was less than last year,” it said. The ministry also warned that food inflation could eat up more of household disposable income, which could “increase the pressure on the price of non-food discretionary items as well as the extent to which the food inflation can be passed on to the consumers via higher input costs”.
The diversification of India’s export markets is likely to help mitigate uncertainty related to the conflict in West Asia and associated uncertainties from US tariff measures. India’s ongoing cooperation, such as working towards diversifying its exports and measures to promote more MSMEs to reach foreign markets, might help in export diversification and market access for India, the report said, while it noted that India’s intention to strengthen global value chains would help develop resilience in those chains.
The current account deficit (CAD) slightly expanded in the first quarter of FY27, but a strong recovery in capital inflows, the services trade surplus and ample foreign exchange reserves offer cushioning to external shocks, the report noted. The Finance Ministry is also keeping a keen eye on the world’s sovereign bond markets. The impact of the rising global bond rates on India could be in two ways: either domestic bond yields could rise with it or if domestic yields are not rising but there is a decline in yield differentials, it could lead to pressure in the rupee.
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