October 2024: India’s Economy Amid Global Uncertainty

    The economic data from September and October 2024 paints a picture that’s both promising and precarious. India’s economy continues to grow, but global risks and domestic challenges demand caution. As I sifted through the latest reports, I couldn’t help but notice a recurring theme: resilience tempered by vulnerability.

Global Challenges: Growth Under Pressure

Globally, the economy is growing at a modest 3.2% (IMF projection for 2024), but this number masks significant weaknesses. Key regions, including Europe and China, are struggling with structural challenges. Closer to home, India’s growth is pegged at 7%, yet it’s hard to ignore the cracks forming under the surface.

Geopolitical tensions like the Russia-Ukraine war and the recent Israel-Iran escalation are weighing on global commodity markets. Energy prices remain volatile, with India feeling the ripple effects in its import bill. For instance, rising crude oil prices, fueled by these conflicts, have pushed India’s petroleum imports higher, widening the trade deficit to $164.7 billion for April-October 2024.

Market Turmoil: FII Exodus and DII Strain

One of the most striking developments was the massive pullout by Foreign Institutional Investors (FIIs). In October alone, FIIs sold nearly ₹1 lakh crore worth of equities, making it one of the highest monthly outflows in recent memory. Geopolitical uncertainties, particularly the Israel-Iran conflict and ongoing Russia-Ukraine war, led to a flight to safety, with investors retreating to less volatile markets like the U.S.

Domestic Institutional Investors (DIIs) did their best to stabilize the market. However, there are signs that their capacity to offset FII withdrawals is waning. Exhaustion among DIIs has become evident, with fewer resources to counter such massive capital outflows. The markets remained volatile throughout October, with indices fluctuating sharply.

Rural Demand: A Bright Spot, But For How Long?

Rural India has been a pillar of strength. Tractor sales hit an all-time high in October, growing 22.4% YoY, reflecting robust rural sentiment. A record Kharif harvest of 164.7 million tonnes and higher MSPs have bolstered farmer incomes.

But there’s reason for caution. While monsoon rains have been above average, erratic weather patterns—likely exacerbated by climate change—remain a looming threat. Additionally, global disruptions to fertilizer supplies, partly due to the Russia-Ukraine war, could impact agricultural productivity and costs in the months ahead.

Inflation: The Persistent Threat

October saw inflation climb to 6.2%, primarily driven by food prices. Vegetables like tomatoes, onions, and potatoes became particularly costly due to supply disruptions. However, core inflation remained subdued at 3.8%, indicating limited spillover to other goods.

Here’s what’s concerning:

• Global oil and edible oil prices, influenced by geopolitical tensions, remain unpredictable.

• While the government’s measures, such as price caps and stock releases, are helping, prolonged conflict in regions critical to global food and energy supplies could further strain India’s inflation trajectory.

Trade: Widening Deficits

India’s merchandise exports grew 3.2% YoY during April-October 2024, driven by pharmaceuticals, chemicals, and engineering goods. Yet, imports outpaced exports, growing 5.8% YoY, pushing the trade deficit higher.

The Russia-Ukraine war continues to impact global shipping routes and commodity flows, raising logistics costs. Meanwhile, the Israel-Iran conflict has added fresh volatility to energy markets, complicating India’s import strategy. Gold imports also surged, as uncertain global markets pushed investors towards safe-haven assets, exacerbating the trade deficit.

Employment and Manufacturing: Mixed Signals

While formal job creation is rising, with payroll additions and improved capacity utilization, other signals are less reassuring. Manufacturing momentum, though expanding, softened in September, as indicated by the PMI decline from 57.5 to 56.5. The Index of Industrial Production (IIP) grew by a modest 1% in August, hinting at a slowdown in industrial activity.

Moreover, anecdotal reports suggest increasing automation and AI adoption, which could displace workers in key sectors. The labor market remains a fragile balancing act.

A Cautious Outlook

India’s economy, though resilient, is deeply intertwined with global events. The geopolitical tensions in Ukraine and the Middle East could have far-reaching consequences, especially for energy and commodity markets. Domestically, inflationary pressures, rural vulnerabilities, and subdued urban demand add to the risks.

While the IMF’s growth forecast of 7% for 2024 offers some optimism, the path ahead is anything but certain. Policymakers will need to navigate this turbulent environment carefully, balancing short-term relief measures with long-term structural reforms.

For now, India’s economy seems steady, but the foundation is not unshakable. As global events evolve, the coming months could test this balance further. Let’s hope the resilience we’ve shown so far can endure.