As the Iseral-Hamas conflict is further aggravating, a Finance Ministry report on Monday apprehended that the worsening of the fraught geopolitical situation may impact the Indian economy. However, it expects the strong economic fundamentals to overcome such unforeseen situation.

“Fraught geopolitical conditions can cause a general increase in global risk aversion. If these risks worsen and are sustained, they can affect economic activity in other countries, including India,” the Monthly Economic Review, prepared by the Economic Affairs Department of the Finance Ministry said. It noted that global uncertainties have been compounded by recent developments in the Persian Gulf. Depending on how the situation develops, crude oil prices may push higher.

Further, the relentless supply of US Treasuries and continued restrictive monetary policy in the US (with further monetary policy tightening not ruled out) could cause financial conditions to be restrictive. At current levels, US stock markets have greater downside risk than upside. If the downside materialises, it will have spillover effects on other markets, the report apprehended.

Talking about positives, the report said that the FY24 outlook for the Indian economy is bright with strong domestic fundamentals. At the same time, good growth has been seen in private consumption and investment demand. “There are additional growth levers in broad-based industrial growth and buoyant residential property markets. Industrial capacity utilisation has improved,” it said while adding that an increase in household demand for residential properties combines with strong public sector capex to reinforce investment.

Kharif sowing has progressed well despite challenges, according to the report. Improved reservoir levels augur well for the upcoming Rabi season, it added. Core inflation is declining steadily, while food inflation has eased. Yet, “there are significant headwinds. Global inflation in 2023 was estimated to decline steadily due to the tight monetary policies of central banks. But fresh challenges have cropped up in adverse geo-political turns and volatile crude prices,” it said.

Although sluggish global demand is affecting India’s trade, this is projected to recover from the ongoing second half of the current fiscal. India’s external position is looking strong as the trade deficit has come down and the Forex Reserve remains strong.

“Echoing all this, RBI‟s forward-looking surveys on manufacturing, consumer confidence, employment, and inflation expectations have optimistic findings. In sum, as IMF projections also confirm, India will remain the fastest-growing major economy in the world in FY24,” the report said.