The Tuesday Interview | Private consumption strong, rural economy reviving, says Ajay Seth

Growth in PMI-services has been even quicker as consumption patterns in India, following the global trend, shift more to services in the absence of mobility curbs, he said.

Though the Indian economy is showing strong consumption levels, geo-economic concerns will continue to be an ‘enduring reality’, according to Ajay Seth, Economic Affairs Secretary in the Union Finance Ministry. In an exclusive interview with DH’s Arup Roychoudhury, Seth said that the recent inflationary surge is due to specific factors with certain items like tomatoes, and prices are expected to come down sometime now. A 1987-batch Karnataka cadre officer, Seth is also the presiding bureaucrat in the G20 Finance Track. He contended that India has brought consensus among competing interests to ensure that the G20 Leaders’ Summit next month will conclude with a unanimous joint statement. Excerpts:

What are your views on the state of the economic revival?

We expect the growth momentum from Q4 of FY23 to carry forward in Q1 of FY24 (April–June). This is based on multiple high-frequency indicators showing sustained activity levels.

Monthly indices of industrial production, core sector, and PMI manufacturing show growth in April–June to underscore the strength of private consumption. Growth in PMI-services has been even quicker as consumption patterns in India, following the global trend, shift more to services in the absence of mobility curbs. A steady decline in the urban unemployment rate, as per the Periodic Labour Force Survey, has kept private consumption strong in the economy. Rural demand is also seeing a revival, as seen in the increased sales of FMCG, two-wheelers, and tractors. An increase in real rural wages, backed by a decline in inflation, has contributed to the strengthening of rural consumption.

In Q1 FY24, the Centre’s capital expenditure grew 59 per cent year-on-year. The Centre has also incentivised states to increase their capex, which grew at 74.3 per cent YoY in the same quarter. This capex push is leading to the crowding in of private investment. Growth in private capex has the rationale in capacity utilisation crossing 75 per cent, an accepted industry trigger for investment.

Net exports are expected to contribute more to GDP growth in Q1 of FY24 as services exports continue to do well, riding on the sustained preference for remote working. However, growth in merchandize exports will need to be monitored as it may be challenged by a weak growth in global demand.

What are the reasons for the spike in food prices, and how much longer is the inflationary trend expected to continue?

It is important to understand that there has not been any general or widespread increase in food prices. It was the higher price of some foods, like tomatoes and some other vegetables, a few grains, and spices, that pushed food inflation up.

However, interruptions in the supply chain of tomatoes due to white fly disease in Karnataka’s Kolar district and the swift arrival of the monsoon in northern India caused a surge in tomato prices. Tur dal prices also went up due to deficient production in the last Kharif season. In contrast, many important food items like edible oils, potatoes, fruits, sugar, tea, and non-vegetarian items have witnessed low levels of inflation. Now, the prices of most of the essential food items are lower than they were a month ago.

Sowing of food grains has picked up, and we are closely watching the progress. Core inflation is declining gradually. This, along with supply-side measures such as restrictions on exports and easing of imports, gives us confidence that headline inflation will revert below 6 per cent soon. Tomato prices are likely to decline with the arrival of fresh stocks by the end of August or early September.

What global factors do you expect to come into play for the remainder of the fiscal year?

Geopolitical and geoeconomic concerns have not abated, and they may be an enduring reality for some time. Developments such as the collapse of the Black Sea grain deal may increase inflationary pressures. Additionally, the US Federal Reserve has reiterated its commitment to bringing inflation below 2 per cent and has conveyed that it will increase interest rates further if deemed necessary.

Evidently, the monetary policy tightening exercise has yet to reach its peak, and this may have implications for developing economies. There is concern about the future course of the Chinese economy, which would dictate the prices of commodities such as crude oil and coal. Downside risks to global stock markets due to rising bond yields and anticipation of further monetary tightening are also likely to affect stock markets in emerging economies.

These prospects indicate a global slowdown, although commodity prices may soften with global demand. This will have positive implications for India’s current account deficit (CAD), which will narrow. However, emerging trade barriers, like trade restrictions on critical minerals, may limit India’s export performance. Yet with service exports expected to continue their surge, the net impact on the CAD is likely to be positive in the remaining fiscal year. India’s forex reserves are large enough to buffer the impact of global challenges.

In the G20, the G-7 and Russia-China blocs still don’t agree over a number of issues. How confident are you of a unanimous joint leader’s statement?

Absolutely. A significant achievement of the Indian Presidency has been that, across workstreams, we have been able to generate consensus on all the major outcomes envisaged since the beginning of the Presidency. The work done over the last eight months or so has resulted in a substantial body of work, and we have negotiated outcomes in all tracks on several issues of importance for the global economy. I am confident that all substantive outcomes under various workstreams will meet with the approval of the leaders.