The International Monetary Fund’s endorsement of India’s economic resilience should not come as a surprise to anyone. India’s fiscal management, starting from the country’s response to the Covid pandemic, where it scrupulously avoided the free-money relief measures announced by many western countries, has been commendable. Domestic demand and substantial investments by the government in public infrastructure have kept the country’s growth engine chugging along at a time when India is negotiating US tariff action, supply chain disruptions caused by two
The International Monetary Fund’s endorsement of India’s economic resilience should not come as a surprise to anyone. India’s fiscal management, starting from the country’s response to the Covid pandemic, where it scrupulously avoided the free-money relief measures announced by many western countries, has been commendable. Domestic demand and substantial investments by the government in public infrastructure have kept the country’s growth engine chugging along at a time when India is negotiating US tariff action, supply chain disruptions caused by two wars, and an oil shock. The economy is expected to grow at over 7% not just this year, but next. That is no small achievement.
As the finance minister gets down to the business of putting together next year’s Union Budget — it is usually presented on February 1, to come into effect from April 1 — she will have to address four challenges: Inflation and a bigger oil shock; global trade and supply chain disruptions; AI; and the climate crisis. Both retail and wholesale inflation have risen substantially and will likely rise more once the government allows the increase in oil prices to filter down to fuel prices (the budgetary math will look very different if the assumption for oil price is even $100 a barrel, the average of India’s crude import basket since April 1), though higher inflation will also boost nominal growth and shore up tax revenues.
On the trade front, while India will benefit from the free trade agreements it has signed, some of which will kick in by next year if not earlier, it will be wary of more tariff action by the US (a large trading partner, and one with whom India enjoys a surplus), and non-tariff measures that could hurt the country’s services exports. The latter, especially IT services, will also be roiled by the AI boom, which has already seen foreign investors desert Indian markets in favour of those with more AI-play. And the recent tragedy in Nepal, and India’s own poor monsoon have yet again highlighted the human — and economic — cost of the climate crisis.
India could, and most likely will, still do better than most countries — the Prime Minister said on Monday that in a world of uncertainty, it offers reliability and stability — but policymakers here would dearly love a less uncertain external environment.
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