Weak Global Demand and Geopolitical Tensions: A Looming Threat to Financial Stability and India’s GDP Growth

With globalisation and the advancement of technology, the world is increasingly coming closer. The same is also applicable to the global financial markets. Now, more than ever, events in one geography have the propensity to affect other financial markets as well. With the same thought, let us understand how global issues are affecting the Indian financial market and GDP growth.

Recently, the Indian Country Director of the Asian Development Bank (ADB), Mio Oka, came out with insights and predictions about the Indian financial and economic climate and GDP growth. She stated that while the overall performance is robust, the economy still has some challenges to address arising from increasing global geopolitical tensions and a weakening demand globally. These factors have the potential to disrupt the market stability. Oka stated that the demand for Indian exports from advanced economies has been falling, which slows down growth. Furthermore, geopolitical issues like oil supply fluctuations can potentially increase inflation and energy costs.

Another crucial aspect to account for is climate change. Unpredictable weather patterns have become a staple in several regions with heat waves. Besides this, specifically in India, the monsoon patterns greatly impact the lives of the agricultural workforce and the rural area population. Insights from Oka also reveal that inflation rates remain high in a few regions of the country, even though inflation has reduced globally. Inflation in India, specifically, has gone slightly down owing to the tightening of monetary policies. However, food prices are still increasing, which has a direct bearing on consumer inflation.

• Weak global demand and geopolitical tensions are slowing India’s export growth and increasing inflation risks, particularly through rising energy costs.
• Monsoon season and agricultural performance remain crucial to managing food prices and inflation.
• India’s resilient growth is supported by strong capital expenditure, private investment, and a robust services sector, with GDP growth projected above 7% for the year.

Oka also stressed the practical fact that monsoons in India have the potential to reduce food prices. This would bring inflation under control and also pave the way for further relaxations in monetary policies.

In the last fiscal year, 2024, Indian stock markets faced international challenges centred around geopolitical conflicts, which slowed down growth in the advanced economies of the world. Despite these signs, Oka is confident that India’s economic and financial growth will be positive and significant.

Looking ahead, it is projected that India will achieve a GDP growth above 7%. This will be supported by key high-performing sectors, which include construction, electricity, and manufacturing. Another positive sign is the increase in the capital expenditure, along with the revival of private investments.

Oka also discussed the service sector of India and how its performance is bringing stability to the financial markets. A few key reliable sectors include business services, financial services, and real estate.

The Asian Development Bank is estimating India’s GDP growth to be 7% in the present financial year.

With a positive outlook for the future, Oka believes that policy reforms are crucial in boosting and maintaining the momentum of the economy. Capital expenditure, regulatory business-friendly environment, and digitalisation should be focused on. Oka also believes that climate change adaptability will play a key role in the near future in strengthening the economy. Besides these, a structural transformation is needed in the form of labour market and land reforms. Increased spending investments in healthcare and education and improved urban governance are crucial to long-term growth.

India's GDP growth and economic growth remain resilient despite the ongoing challenges of weak global demand and geopolitical tensions. While inflation and fluctuating energy costs pose risks, robust performance in key sectors like manufacturing, services, and infrastructure investments continue to drive positive momentum. Moving forward, the implementation of crucial policy reforms, alongside the country's focus on climate adaptability and economic diversification, will be key to sustaining growth and maintaining financial stability.