Union Finance Minister Nirmala Sitharaman addresses the 11th SBI Banking & Economics Conclave 2024 in Mumbai on November 18, 2024.
| Photo Credit: ANI

Seeking to quell anxieties about a slowdown in the economy, Union Finance Minister Nirmala Sitharaman on Monday asserted that the government was fully aware of domestic and global challenges and there was “no cause for undue concern”.

Ms. Sitharaman batted for lower interest rates to spur private investments while acknowledging that perishable vegetables continue to pose an inflation risk.

Acknowledging that there has been moderation in some economic indicators, Ms. Sitharaman, however, brushed them aside and said India’s economy remained resilient, underpinned by strong macroeconomic fundamentals, moderating inflation, robust external position, and continued fiscal consolidation that have reinforced confidence among both consumers and businesses.

“I need to address the concerns arising from recent signs of moderation in certain economic indicators. The concerns are there… Whilst I acknowledge the remarkable growth trajectory and promising prospects of the Indian economy, it is also important to address the concern… let me assure you that the government is fully aware of the challenges posed by domestic and global factors,” the Minister said at the SBI Banking and Economics Conclave.

The remarks assume significance in the light of slackening momentum in the economy, marked by faltering urban demand and weak corporate results for the second quarter that some economists have even posited as a “cyclical slowdown”.

“There is no cause for undue concern. Recent high frequency indicators also reflect sustained growth momentum. Record e-way bill generation, buoyant trends in rural demand, and strong PMI data for manufacturing and services underscore the steady pace of economic activity,” she said.

She also pointed to healthy growth in foreign direct investment inflows this year and foreign exchange reserves that “comfortably cover 11.8 months of imports and exceed 100% of external debt, underlining the strong net buffer in the Indian economy”.

“So let me assure you all that the government is closely monitoring an evolving situation. We remain committed to taking all necessary measures to ensure that India remains fully and firmly on course to become the third largest economy in the world,” she said.

While noting that stress on the inflation front is coming from three perishables — tomato, onion, and potato — Ms. Sitharaman said she did not want to wade into the debate on whether these should be excluded from the retail inflation measure, but that India periodically suffered from supply inadequacy of these commodities.

“We, as a government, are making a lot of efforts towards scientific and more rigorous storage facility for perishable commodities. So till you really get on the top of that issue, you will periodically have this problem causing immense stress in a cyclical fashion,” Ms. Sitharaman noted.

“Equally, I think what is important is when you look at India’s growth requirements and you have so many different voices coming out and saying the cost of borrowing is really very stressful. At a time when we want industries to ramp up and move, building capacities, our bank interest rates will have to be far more affordable. These are our requirements if we have to make Viksit Bharat not just an aspiration, but a reality. So we need to have a lot more conversation on this,” she said.

High inflation will dog the world economy next year, with three-quarters of over 200 economists polled by Reuters saying the main risk is that it turns out higher than they forecast, suggesting interest rates will also remain higher for longer.

Several central banks are still expected to begin cutting interest rates by the middle of 2024, but a growing number of economists surveyed are adjusting their views, pushing the more likely date into the second half of next year.

This is a significant change from expectations at the start of this year. Then, some investment banks were predicting the U.S. Federal Reserve, which sets the tone for many others, would be cutting rates right around now.

Despite broad success in bringing inflation down from its highs – the easier bit – prices are still rising faster than most central banks would prefer and hitting their inflation targets is likely to be tough.

The latest Reuters poll of over 500 economists taken between Oct. 6 and Oct. 25 produced 2024 growth downgrades and inflation upgrades for a majority of the 48 economies around the world surveyed.

A 75% majority who answered a separate question, 171 of 228, said the risk to these broadly-upgraded inflation forecasts was skewed higher, with only 57 saying lower.

The results follow news on Thursday the U.S. economy unexpectedly grew nearly 5%, annualised, in the third quarter, underscoring how the strength of the world’s largest economy is setting it apart from most of its peers.

The survey results also follow a warning from European Central Bank President Christine Lagarde, who said after the ECB snapped a 10-meeting tightening streak that “even having a discussion on a cut is totally, totally premature”.

While many central banks, including the Fed and the ECB, have presented a “higher for longer” narrative on rates for the better part of this year, many economists and financial market traders have been reluctant to accept that view.

“I think all of us have to keep an open mind that maybe policy isn’t restrictive enough,” said Douglas Porter, chief economist at BMO.

“Our forecast is that the Fed has done enough and they don’t have to raise rates further, but I haven’t closed off the possibility we could be wrong and the Fed does ultimately have to do more.”

While most economists still say the Fed will cut by mid-year, the latest poll shows just 55% backing that scenario compared with over 70% last month.

The Reserve Bank of New Zealand, which often leads the interest rate cycle, was also forecast to wait until July-September 2024 before cutting.

The majority backing no cuts until the second half of 2024 has also grown stronger for the Reserve Bank of Australia, Bank Indonesia and the Reserve Bank of India.

Even the Bank of Japan, the outlier sticking to ultra-loose policy through this entire round of inflation, is now expected to abandon negative interest rates next year.

Crucially, most economists agree the first easing steps will not be the beginning of a rapid series of cuts.

Asked what would prompt the first cut by the central bank they cover, over a two-thirds majority, 149 of 219, said it would be simply to make real interest rates less restrictive as inflation falls.

The remaining 70 said the first move would mark a shift towards stimulating the economy, suggesting only a minority expect a hard enough hit to demand and inflation to warrant a monetary response.

Global economic growth was forecast to slow to 2.6% next year from an expected 2.9% this year.

“Central banks have had the highest rates in order to fight inflation … it’s certainly restraining activity, and it’s going to be a while before we get global growth above what has been its historical average,” said Nathan Sheets, global chief economist at Citi.