Conditions shaping up for “trend upshift” in real GDP growth
Extreme weather events may pose a risk to India’s inflation in the near-term, along with geopolitical tensions that could keep crude oil prices “volatile”, the Reserve Bank of India (RBI) said in its April Bulletin.
Retail inflation in March eased 4.85%, after averaging 5.1% in January-March. Food inflation, despite some signs of moderation, remains elevated and a potential source of risk to the disinflation trajectory, according to a paper titled ‘State of the Economy’ released as part of the bulletin.
The RBI, however, said that with 4% inflation finally being sighted, there is greater confidence now that the descent of inflation to the target is imminent.
The weather department has projected April-June to record “above-normal” temperatures, and some sections of the country to witness heatwaves.
Many economists expect CPI inflation to average 5-5.2% in Q1 FY25, as against 4.9% projected by the central bank.
The RBI paper also said that conditions are shaping up for extension of a “trend upshift” in real GDP growth, backed by strong investment demand and upbeat business and consumer sentiments.
According to the paper, the evolution of inflation dynamics in recent prints favours India’s growth ambitions. “Starting in January 2024, the softening of headline inflation is providing a tailwind to growth impulses,” it said.
The RBI has kept the policy repo rate unchanged at 6.5% since February 2023, citing concerns on the inflation front.
CPI inflation gravitated to 4.9% in March after averaging 5.1% in the preceding two months following the recent peak at 5.7% in December 2023. This trajectory was along anticipated lines, with Q4 FY24 inflation outcome of 5% per cent in alignment with projections. “The softening of core (CPI excluding food and fuel) inflation to historic lows in March, driven by moderation across goods and services components, gives credence to the conduct of disinflationary monetary policy,” said the paper. In March, core inflation came in at 3.3%, the lowest in the current CPI series, with base year 2012.
To be sure, inflation in cereals, vegetables (mainly potato), milk and meat saw sequential rise in March, giving credence to the RBI’s view that inflation trajectory would be guided by food prices. The year-on-year inflation in ‘cereals and products’ rose from 7.60% in February to 8.37% in March, despite the beginning of the harvesting of the wheat crop during the month.
India’s GDP is projected to grow at 7.6% in FY24 (according to NSO) and 7% in FY25 (as per the RBI). The real GDP growth likely averaged above 8% during 2021-24.
The conditions are apposite, with the credit quality of Indian corporates having strengthened on the back of “deleverage balance sheets, sustained domestic demand and public capital expenditure” – rating upgrades have continued to surpass downgrades, said the paper authored by RBI staff members including Deputy Governor Michael Patra.
Analysis shows that the contribution of fixed capital stock to the growth of gross value added (GVA) in India has started improving from the low to which it had declined during the pandemic. By 2021-22, its contribution to the growth of GVA had recovered to 32%, although there is still catch-up to attain vis-a-vis pre-pandemic levels. “If this is augmented by the quality of the capital stock embodied in its composition, the contribution goes up close to 34%,” said the paper.
According to the paper, “Total factor productivity” (TFP) has become the most important driver of GVA growth in the post-pandemic period after declining during 2018-21. By 2021-22, it accounted for close to 45% of the growth of GVA. “TFP growth improved across all the sectors of the economy (FY24), with the sharpest enhancement observed in services,” the paper said.
In order to achieve its developmental aspirations over the next three decades, the Indian economy must grow at a rate of 8-10% per annum over the next decade to reap the demographic dividend that started accruing from 2018 and, as calculations show, will last till 2055, the paper noted.
Meanwhile, the paper also said that the evolution of inflation dynamics in recent prints favours India’s growth ambitions. “Starting in January 2024, the softening of headline inflation is providing a tailwind to growth impulses,” it said.
“Careful monitoring during the summer is warranted as overlapping food price shocks play out, before an above normal southwest monsoon this year, as projected by the India Meteorological Department (IMD), enabling an easing of food price pressures,” the paper said.
The World Meteorological Organisation (WMO) has sounded a red alert about global warming in its latest report “State of the Global Climate 2023”, stating that there is a high probability that 2024 will breach the threshold set in 2023 as the hottest year on record even as the world careens towards a freshwater shortage crisis.
“Data from the Indian Meteorological Department (IMD) reflects a worrying escalation in extreme weather events necessitating an urgent and collective response,” says the WMO report.
Source:financialexpress.com