Generally, the momentum for prices is higher in the first half of the financial year.
The retail inflation trajectory faces risk if monsoon turns out to be “weak”, as the momentum for prices is higher in the first half of the financial year, said Shashanka Bhide, external member of the Reserve Bank of India’s Monetary Policy Committee told Priyansh Verma in an interview. On growth, Bhide mentioned that there are risks to the projected numbers, both “domestic and external”. He said that while the indicators for the first couple of months of Q1 showed a mixed picture, investment demand is expected to pick up going forward. Excerpts:
Q. How much does the prospect of a weak monsoon worry you? Are you seeing upside risks to food inflation, and subsequently the headline rate, from Q2FY25 onwards?
Generally, the momentum for prices is higher in the first half of the financial year. A favourable monsoon, raising the prospects of a good agricultural output, would keep the momentum low. A favourable monsoon would also raise the rabi crop prospects. In this sense, a well distributed monsoon is crucial for us. The supply-side measures geared to even out temporary supply-demand mismatches would also limit price speculative pressures. There are risks, therefore, to the inflation trajectory if there is weak monsoon.
Q. You have said a real interest rate of 1.5% is appropriate for the economy, but we are slowly moving towards a 2% rate, which some say could dampen demand. In the current situation, when demand is rather tepid, shouldn’t the repo rate cut be advanced?
We should also take into account the inflation target so that fluctuations in inflation rate do not lead to more difficult inflation-growth trade-off. At this point, we are looking at inflation moving to the target and a durable moderate inflation is necessary for supporting demand.
Q. What’s your assessment of private consumption in the country? How much do you expect it to recover in FY25, from its levels in FY24?
Private consumption demand grew by 4 % in FY 24 as per the provisional estimates, higher than in the previous year. Based on a good agricultural rebound, and moderate inflation, consumption growth is expected to improve, supported by rural demand.
Q. RBI has kept the growth projection at 7.2% for FY25, but many economists expect it to be much below 7%. Also, you’ve said that investment demand indicators in the first two months of Q1, reflect a mixed picture. Are you then hopeful, India will grow at 7.2% this year?
There are risks to the projected numbers, both domestic and external. External demand conditions are expected to improve but there are concerns of supply disruptions due to on-going conflicts. A good agricultural growth is important for sustaining growth momentum this year. Equally important is the continued high growth of manufacturing. Although indicators for the first couple of months of Q1 showed mixed picture, investment demand is expected to pickup given the strong focus of policies for the development of infrastructure and manufacturing.
Q. Is there a need to increase public capex allocation in the full Budget, from Rs 11.1 trillion projected in the interim Budget, to support investments?
The overall fiscal consolidation is an important goal and merely raising capex would not attract private demand. I would consider reforms aimed at improving infrastructure and support for investments with broader impact on small and medium enterprises as crucial.
Q. Do you agree with the perception that the country’s growth is “below potential”?
We had an average of 7.5% annual GDP growth in the last two years. This has been achieved in the absence of a strong external demand. There may be some slack in production capacity as well due to demand conditions and production inefficiency. From a longer- term perspective, there is an upside to growth prospects as external demand conditions improve. The many rapid changes that we see in technology provide new growth opportunities, just as the rising trained and young labour force offer augmented supply side. The upside, therefore, is significant although challenges are also significant. We cannot miss these growth opportunities and opportunities to make the benefits inclusive.
Source:financialexpress.com