India’s Best Is Yet To Come: RBI
IN DEPTH
By Anil Padmanabhan
In the latest review of its monetary policy, the Reserve Bank of India (RBI), observed that retail inflation had peaked, economic growth had acquired a momentum of its own, and that threats if any emanated from the external sector—geopolitics, geoeconomic fragmentation and climate change. In short, the best of the Indian economy is yet to come.
For the current fiscal year (2024-25), the country’s central bank forecast India’s economic growth at 7.2 percent and retail inflation at 4.5 percent—within the specified inflation band of 4-6 percent.
Addressing the press conference after the presentation of the credit policy, RBI Governor Shaktikanta Das argued that the risks to both growth and inflation are “evenly balanced” and then added, “Today, the Indian economy presents a picture of stability and strength. The balance between inflation and growth is well-poised. India’s growth story remains intact.”
India on the Growth Turnpike
In the last fiscal year, India’s economic growth averaged a staggering 8.3 percent—only the ninth time that the country managed to top eight percent. It surprised on the upside and caught most analysts unawares.
India’s economic performance is especially impressive, if one factors for the unprecedented circumstances of three back-to-back shocks to the economy, beginning in 2020: The covid-19 pandemic, Russia-Ukraine war, and the US-Fed’s decision to ramp up interest rates in a record fashion, causing the dollar to appreciate against most international currencies, in turn leading to the export of inflation to the rest of the world, including India. In fact, the Indian economy had contracted by 5.8 percent in 2020-21.
Key reasons contributing to this impressive rebound of the Indian economy are the structural reforms it has undertaken in the last decade, together with its ability to resolve legacy deficits in electricity, banking, cooking gas, drinking water and s on. Speaking to media on the sidelines of an investor conference held in Singapore in March this year, chief economic advisor Anantha Nageswaran, maintained that the recovery in growth was not unexpected.
“I will even say that sometimes we do not really comprehend the lagged effect of so many things that have been put in motion since 2016 – policies like the IBC (Insolvency and Bankruptcy Code), GST (Goods and Services Tax), etc. And then when shocks like the COVID-19 pandemic and the Ukraine-Russia war, which caused oil prices to spike, start to fade away, the lagged effect of those things in transition come through in full force,” he said, before adding, “That is why we get taken by surprise when we see the magnitude. But then if you really understand that these things operate with a lag, and there is a pent-up effect that works, then you would not be surprised.”
More importantly, the Indian economy has discovered a new trend rate of growth, which economists believe is around seven percent, a level at which the economy will not overheat and trigger an inflation spiral. Previously, this trend rate of growth was around five percent.
The RBI View
The central bank’s cause for optimism is that the Indian economy is beginning to fire on both cylinders: consumption and investment.
- Growth in private final consumption expenditure (PFCE) accelerated to a seven-quarter high of 7.4 percent in Q1:2024-25;
- Growth in gross fixed capital formation (GFCF) was 7.5 percent in Q1:2024-25 (6.5percent in Q4:2023-24);
- And the share of GFCF in GDP stood at 34.8 percent – the highest since Q2:2012-13.
On the demand side, an excellent Monsoon, according to RBI, is working its magic, especially in rural India.
- During the current Southwest Monsoon season, the cumulative rainfall has been eight percent above the Long Period Average (LPA), compared to six percent below LPA during the corresponding period last year;
- The total area sown under kharif crops, as of September 27, 2024, at 1108.6 lakh hectares is 101.1 percent of the full season normal area;
- Further, the area under major crops—rice, pulses, coarse cereals, oilseeds, and sugarcane—is higher over last year; however, it is lower in the case of cotton;
- All-India water storage in 155 major reservoirs stood at 88 percent of the total capacity as of 3 October 2024, as against 74 percent a year ago and decadal average of 77 percent;
- The current storage level is 18.3 percent above the level in the corresponding period of last year and 14 percent over the 10-year average.
Private investment, which has been all but missing since the 2008 global financial crisis, is reviving. Alongside, government capex, mainstay of the growth revival in the last four years, has recovered after contracting in the general election period.
“Private investment continues to gain steam on the back of expansion in non-food bank credit, higher capacity utilisation and rising investment intentions. On the external front, services exports is supporting overall growth,” the RBI Governor said.
To argue its case RBI listed the following data points:
- Bank credit to food processing, textiles, chemicals, base metal, and engineering goods increased y-o-y by 14.4 percent, 6.4 percent, 15.9 percent, 16.1 percent, and 16.6 percent respectively in August 2024;
- Among infrastructure sectors, bank credit recorded growth of 4.1 percent, 4.2 percent and contracted by 1.7 percent respectively, in power, roads, and telecommunication respectively in August;
- Seasonally adjusted capacity utilisation inched up to 75.8 percent in Q1:2024-25 from 74.6 percent in Q4:2023-24;
- Surveys conducted by RBI reveal that investment intentions among corporates improved for 2024-25, with most firms planning similar or higher investments compared to last year;
- Central government capex increased by 25.8 percent in July-August 2024 after contracting by 35 percent in Q1:2024-25.
If we connect all the dots, RBI’s message on the Indian economy is clear: The best is yet to come.
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