Concerns about the Indian economy amid global uncertainties

Source: The post concerns about the Indian economy amid global uncertainties has been created, based on the article “Two big risks and two challenges for India” published in “Business Standards” on 11th October is 2024

UPSC Syllabus Topic: GS Paper 3 – Economy-growth and development

Context: The article discusses concerns about the Indian economy amid global uncertainties. It highlights rising oil prices, geopolitical tensions, and challenges in foreign investment. It notes India’s efforts to attract FDI but warns of declining inflows and overvalued stocks affecting foreign institutional investments.

What is the outlook for India’s economic growth?

The Indian economy is expected to meet the Economic Survey’s growth forecast of 6.5-7% for FY25. However, global events could disrupt this forecast, especially with rising oil prices and geopolitical risks.

What are the major concerns about the global economy?

1. Rising Oil Prices: Brent crude oil is around $80 per barrel, a 16% increase from September’s low. A rise beyond $100 would be worrisome for global economic stability.
2. Geopolitical Tensions: The Ukraine war saw oil prices peak at $120 in June 2022, but “managed escalation” has helped maintain prices below $80 since July 2022. The Israel-Iran conflict, if escalated, poses a risk to the global economy.
3. Potential Trump Policies: A Trump victory could lead to disruptive policies like tax cuts, 60% tariffs on Chinese goods, and 20% tariffs on all imports, which may slow U.S. growth and cause global economic instability.

What is Managed Escalation?

1. “Managed escalation” is a strategy where conflict is gradually intensified without causing direct large-scale war.
2. NATO applied it in Ukraine, helping Ukraine fight Russia while avoiding NATO’s direct involvement.
3. Despite the Ukraine war, oil prices stayed below $100 per barrel after June 2022, showing the strategy’s effectiveness.
4. This doctrine has also been applied in Israel’s conflict with Hezbollah and Iran, limiting casualties.
5. The risk remains that miscalculations or deliberate actions could escalate conflicts beyond control, especially with recent Israeli successes against Hezbollah.

What are the economic challenges which is specific to India?

1. Declining FDI Inflows: Net FDI fell by $28 billion in 2023-24 compared to 2021-22. Gross inflows dropped from $85 billion in 2021-22 to $71 billion in 2023-24, raising concerns about India’s investment appeal.
2. Falling FII Investments: FIIs invested $44 billion in 2023-24, but investments dropped to $6.3 billion in the April-July period of FY25, partly due to overvalued Indian stocks and a shift to Chinese markets with lower valuations.

For more information on India’s Economic Growth and challenges read this article here

Conclusion

India’s economic stability is threatened by external factors like geopolitical risks, protectionism, and instability in Western banking, despite the country’s internal economic management efforts.

Question for practice:

Discuss how global uncertainties, such as rising oil prices and geopolitical tensions, impact India’s economic growth and foreign investment landscape.