As the festive season approaches, excitement fills the air, heralding the return of Diwali celebrations throughout the country. Vibrant streets adorned with colourful flowers, decorative items, and twinkling lights create an atmosphere of joy.
Marketplaces bustle with shoppers eager to buy gifts, sweets, and traditional items. This surge in consumer activity is not just a social phenomenon; it significantly impacts the economy, as consumer sentiment during festive periods like Diwali serves as a key indicator of economic health.
Diwali profoundly influences demand in the economy. Recently, however, there has been a noticeable contraction in consumer demand within India. Given this backdrop, the festival presents an excellent opportunity to rejuvenate economic activity.
This year, we can expect Diwali to provide a much-needed boost, as indicated by various market trends and consumer behaviours.
One immediate effect of the festive season is seen in the bullion market. India is the largest consumer of gold globally, and demand typically surges during Diwali. Currently, gold prices are rising, with expectations of an increase of around Rs 5,000 in the coming months. Silver is also poised for a notable impact, driven by the recovery of the Chinese economy and growth prospects in the US and Europe.
As Diwali is celebrated, silver prices could reach approximately Rs 1,25,000 per kg, indicating a higher potential for price fluctuations compared to gold.
Beyond precious metals, various sectors of the economy are set to benefit from increased demand. The automotive industry, informal sectors like pottery and handicrafts, and producers of gift items are all likely to see a boost.
Rising demand will lead to increased production, positively impacting GDP and employment levels, with a significant uptick in temporary job opportunities expected.
This increase in demand could trigger multiplier and accelerator effects, fostering sustained economic growth. I am optimistic that Diwali will act as a catalyst for further development, especially given the robust growth observed in recent years, particularly after the pandemic, with growth rates of 9.7% in 2022, followed by 7% and 8.2%.
The fundamentals of the economy remain strong, with the Index of Industrial Production (IIP) showing growth rates between 4.5% and 5%. The external sector is thriving, buoyed by solid export demand, with foreign exchange reserves at US dollar 700 billion and a stable rupee of around Rs 83 per dollar.
The investment landscape is also positive, as the stock market demonstrates resilience, and Foreign Direct Investment (FDI) flows remain strong.
The International Monetary Fund (IMF) projects a growth rate of 7% for India this year, with the possibility of exceeding this figure, driven by strong agricultural activity and a vibrant services sector. Despite global challenges, the resilience of our economy is evident in the festive demand we're witnessing, with bustling markets celebrating the season.
Consumer electronics, gems, and jewellery are sectors particularly well-positioned for strong demand. Promotional activities in electronics have rationalised prices, while the demand for gold and silver remains robust as consumers purchase these commodities for investment and celebration.
Although the automotive industry has faced challenges, there is optimism that Diwali will spur interest and increase purchases. However, sales may still fall short of previous highs. Addressing challenges in the auto sector is crucial; revitalisation during Diwali could significantly benefit the economy.
The software industry is also witnessing a revival in demand, countering earlier expectations of a decline in the U.S. market. Additionally, fears of a slowdown in the metals sector are waning as we progress through Diwali. The recovery of the Chinese economy presents benefits for India, particularly in terms of increased global demand.
However, potential downsides exist. As the Chinese economy rebounds, we might see a redirection of investments, with a good chunk potentially withdrawn from the Indian stock market. A significant withdrawal occurred recently, and a similar trend could emerge based on the relative growth of both countries.
Globally, the narrative is shifting. A recession in the American economy now seems unlikely, and declines in the Chinese economy appear to have stabilised. If China continues to recover, it will also influence oil markets. Currently, oil prices are weak, which may benefit the Indian economy, with sustainable levels around US dollar 75 to 80.
In conclusion, while the global economic landscape appears supportive, domestic narratives are gaining strength. The automotive sector requires urgent attention, and while growth presents manageable challenges, the employment situation remains critical. Without job creation, our efforts may not yield meaningful results.
Despite a slowdown last year, expectations for this year are optimistic, with agricultural growth anticipated between 5% and 6%. This positive trajectory supports overall demand and aligns with rising income levels among rural residents.
The IMF projects India will grow by more than 6.5% over the next several years, contrasting with China’s projected growth of around 4%.
The Indian economy faces significant challenges, and merely celebrating Diwali will not suffice to sustain demand levels. However, my assessment of the domestic story is optimistic, as I believe we are on track.
We must remain aware of potential global slowdowns, particularly in Europe, while also recognising the positive signs in the American economy.
Sustained intervention and support from both fiscal and monetary fronts are essential. The RBI should adopt a more proactive stance in monetary policy, following the lead of other central banks. Lowering interest rates is crucial to decreasing production costs and fostering positive sentiment in the economy.
Reflecting on our economic history, it is evident that our growth trajectory must be accompanied by job creation. We need a paradigm shift, focusing on rural development and human development, alongside industry and services. By igniting these engines, we can achieve double-digit growth that generates employment.
In summary, the festive spirit of Diwali not only ignites joy but also serves as a crucial marker for economic activity. By harnessing the momentum generated by consumer sentiment and robust economic fundamentals, we can unlock the full potential of India's economy, creating a brighter future for all.
(The author is an advocate by profession)