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The recently concluded G20 Summit in New Delhi, themed “Vasudhaiva Kutumbakam” or “One Earth, One Family, One Future” with a focus on sustainable global development, saw the unanimous approval of the Delhi Declaration, encompassing 83 critical paragraphs. Key achievements included the formal inclusion of the African Union within the G20, the initiation of the India-Middle East-Europe Economic Corridor (IMEC), the launch of the Global Biofuel Alliance, and a renewed emphasis on digital public infrastructure, artificial intelligence, and international taxation. Amidst the celebratory atmosphere, the summit’s potential to address global challenges got overshadowed. However, India now confronts economic headwinds on both international and domestic fronts.

International Challenges

Internationally, surging crude oil prices present a significant challenge for the Indian government. Prices soared following the agreement between Saudi Arabia and Russia in early September to extend their voluntary oil production cuts throughout the year. Saudi Arabia pledged a daily cut of one million barrels, while Russia committed to reducing oil exports by 300,000 barrels per day by year-end. Consequently, the benchmark Brent crude, which had been trading between $75 and $85 per barrel since October 2022, swiftly surged to $90 to $95 per barrel. India, which imports over 85% of its petroleum requirements, is vulnerable to inflation and potential fiscal tightening due to rising crude prices. Additionally, the Indian Rupee may face depreciation as increased foreign exchange outflows are required to pay for higher-priced crude oil imports.

India’s export performance has also been lacklustre in recent months, resulting in a depletion of foreign exchange reserves. Between April and August this year, exports declined by 11.9% to $172.95 billion, while imports decreased by 12% to $271.83 billion. Consequently, India’s trade deficit reached a 10-month high of $24.16 billion in August 2023. Foreign exchange reserves, which stood at $603 billion in late July 2023, had fallen to $593 billion by September 15, 2023. The Reserve Bank of India (RBI) had to intervene by selling dollars through public sector banks to prevent the Rupee from plummeting further. Additionally, a decline in oil exports to European nations, following a ban on Russian diesel and other oil products by the European Union, has contributed to this decrease in foreign exchange reserves.

In the realm of food products, the Indian government has taken measures to mitigate supply shocks and reduce food inflation. These actions include the continuation of bans on the export of wheat, non-basmati white rice, and sugar, as well as the imposition of stock limits on certain pulses. Furthermore, a 40% export duty has been imposed on onions to curb exports and stabilize domestic prices.

Diplomatic tensions between India and Canada have also emerged, resulting in retaliatory measures such as expulsions and visa suspensions. These tensions cast uncertainty over bilateral trade relations, Free Trade Agreement (FTA) negotiations, and Canadian pension fund investments in India. These international economic challenges are compounding the economic headwinds facing India.

Domestic Challenges

Domestically, the Indian economy grapples with high consumer price inflation. Although the Consumer Price Index (CPI) or retail inflation decreased to approximately 6.83% in August 2023 from its 15-month high of 7.44% in July 2023, food inflation remained stubbornly high at 9.94% in August, well above the Reserve Bank of India’s (RBI) tolerance limit of 4% plus 2%. Uneven rainfall patterns have created uncertainties regarding the Kharif crop, particularly pulses, spices, and sugarcane, potentially driving inflation soon. Additionally, water shortages in reservoirs, particularly in southern India, may impact the sowing of Rabi crops, particularly wheat, in the next crop cycle.

High inflation, coupled with low rural wages, exacerbates issues in rural India. According to labour bureau data reported in July 2023, real wages, adjusted for inflation, have contracted for 16 consecutive months. Demand for the rural jobs guarantee scheme (MGNREGA) remains high, nearly reaching 2021 levels following the second wave of the pandemic. In the first four months of the fiscal year 2023-24 (April to July 2023), 9.84 crore households participated in the scheme, approaching the 9.97 crore households in 2021.

Data from the Reserve Bank of India reveals a consistent decline in the net financial assets of Indian households, dropping from 11.5% of GDP in 2020-21 to 7.2% in 2021-22 and further to 5.1% during 2022-23. In 2022-23, net financial assets of households fell to ` 13.8 trillion from `17 trillion in 2021-22. Although gross financial assets grew by 14% between 2021-22 and 2022-23, financial liabilities increased substantially by 76%, outpacing asset growth. Consequently, net financial savings as a percentage of GDP decreased.

The combined impact of economic headwinds from both international and domestic fronts exerts pressure on India’s Gross Domestic Product (GDP). While Reserve Bank of India Governor Shaktikanta Das has announced a projected GDP growth of 6.5% for 2023-24, the negative effects of these international and domestic factors cast doubt on achieving this target, signalling ongoing challenges for the nation’s populace.