Ways to fire up growth engines

The Monetary Policy Committee (MPC) has yet again unanimously decided to keep the policy rate unchanged at 6.5% in the second bi-monthly Monetary Policy Review for FY 2024, as expected by many economists and the market. Consequently, the standing deposit facility (SDF) rate remains at 6.25% and the marginal standing facility (MSF) and the bank rate at 6.75 per cent.

It has also retained the stance of “withdrawal of accommodation” with a 5:1 majority. Of late, inflation has been showing a declining trend and April 2023 CPI inflation came down to 4.7%, the lowest since November 2021. Inflation during 2022-23 was at 6.7 %, which implies that the inflation in April 2023 is at a tolerance level. However, the same is above the inflation target of 4% set for RBI.

In its earlier policy meeting and in the latest one, the RBI has further emphasized and reiterated that the goal is to achieve the target of 4% going forward and accordingly the RBI Governor has stated that headline inflation still remains above the target. Being within the tolerance level is not enough. In his words “given the uncertainties, withdrawal of accommodation should be seen from this perspective.”

Risks perceived by RBI: Geo-political tensions, uncertainties around the monsoon and international commodity prices, especially sugar rice and crude oil, and volatility in global financial markets are the risks which could, in RBI’s view, pose upside risks to inflation. Already monsoon has been delayed. However IMD forecasts a normal South-West Monsoon even though there is a risk with regard to distribution of rainfall due to interplay between El Nino and Indian Ocean Dipole (IOD). RBI has further lowered the inflation projection to 5.1% from 5.2% in April policy projections.

The Repo rate was paused primarily to gauge the impact of more than 250 basis points increase in Repo Rate to 6.25% in the earlier monetary policy actions. Incoming data had suggested that the previous action has moderated inflation expectations by 60 to70 basis points since September, which led to an unchanged policy rate.

However with strict vigil on the evolving inflation and growth outlook, the RBI Governor stated, “it will take further monetary actions promptly and appropriately as required to keep the inflation expectations firmly anchored and bring down inflation to the target”.

Taking into account the positive factors and normal monsoon, CPI inflation is projected at Q1 at 4.6 per cent, Q2 at 5.2 per cent, Q3 at 5.4 per cent and Q4 at 5.2 per cent and 5.1 per cent for 2o23-24. One has to see when the central bank will start decreasing the Repo Rate and change its stance from withdrawal of accommodation to neutral. Very few expect that it could decide to cut Repo rate only in the last quarter of Fy 2024.

Growth projections for 2023-24: The RBI has maintained its GDP growth projections at 6.5 per cent for 2023-24 as per April policy projections. Many felt that the 6.5 per cent projections were pessimistic looking at the global economic uncertainty and low world economic growth projected for FY 2023.

The latest government data indicated a strong GDP growth of 7.2 per cent in 2022-23, stronger than the earlier estimate of seven per cent. Q4 of 2022-23 recorded real GDP growth of 6.1 per cent, much higher than estimates, from 4.5 per cent in Q3, due to fixed investment and higher net exports. Similarly, the gross value added (GVA) accelerated from 4.7 per cent in Q3 to 6.5 per cent in Q4, due to rebound in manufacturing activity. The growth in 2023-24 is looking brighter even though lesser at 6.5 per cent projected for 2023-24 as against 7.2 recorded for 2022-23. The buoyancy in urban demand, revival in rural demand, enhanced investment activity, double digit credit growth of 15.6 per cent, surveys indicating higher investment intentions for 2023-24, the slow growth in imports and adequate growth in merchandise exports, however much lesser than expected, strong growth in service exports are some of the positive indicators for RBI projections at 6.5 per cent for 2023-24.

The purchasing Managers’ Index (PMI) at 58.7 in May, a 31-month high, and PMI services’ strong expansion at 61.2 in May 2023 are some of the other positive factors.

Other likely positive factors include higher rabi production, normal monsoon, buoyancy in services, softening inflation, a healthy twin balance sheet of

banks and corporates, supply chain normalization, declining uncertainty, capex cycle gaining momentum, a robust government capex expenditure, optimism with regard to consumer demand and business outlook.

The risks to the expected GDP growth, among others, include intensity of El Nino impact, continued geo-political tensions, weak external demand and volatile global financial markets. It is to be watched how the evolving economic, external and consumer demand will shape up in the current financial year. However, there is a need to fine-tune policy reforms, further opening up and ease of doing business and ensure larger share of FDI. The net FDI flows to India were $ 28 billion in 2022-23 compared to 38.6 billion in the previous year. It is also necessary to further enable large foreign portfolio investment (FPI), which saw significant turnaround in 2023-24 led by equity flows. The net FPI flows stand at $ 8.4 billion during the current financial year (up to June 6) as against net outflows in the preceding two years-$ 14.1 billion in 2021-22, and $ 5.9 billion in 2022-23. This helped India to regain its comfortable position in forex reserves. Inclusive of net forward assets exchange reserves are well above $ 600 billion.

India has to ensure investment-led, export-led and domestic consumption-led growth drivers to act as favorable levers for continued sustainable growth. According to CEIC estimates, Indian investment

accounted for 28.4%, indicating that there is a lot to catch up looking to all-time high of 41.2% in September 2011. Similarly, according to CEIC, India’s private consumption accounted for 63.3% of its Nominal GDP in December 2022,compared to 61.7% in the previous quarter. According to a SBI report, investment and savings data for the past decade reveals that gross capital formation (GCF ) by the government touched a high of 11.8 % in 2021-22 up from 10.7 % in 2020-21.This had a positive impact on private sector investment from 10% to 10.8% in the same period. The report further adds that the gross capital formation is supposed to have crossed 32 per cent in 2022-23, the highest since 2018-19. Similarly, gross savings have risen to 30% from 29% in 2020-21 and the ratio is supposed to have crossed 31% in 2022-23, the highest since 2018-19.

Meanwhile, during 2022-23, services exports grew faster (27.9 per cent) than merchandise exports (6.9 per cent). One more factor that has been narrowing trade deficit in recent months is the stronger decline in imports vis-à-vis exports. The Production Linked Incentive (PLI) is also gaining traction across sectors. India’s current account deficit narrows to 2.2% of GDP in Q3 from 3.7 % in Q2, which would have moderated further in Q4 2022-23.

These are favourable macro-economic factors well managed and positive indicators to plan ahead with higher GDP growth.

According to Chief Economic Adviser V Anantha Nageshwaran, the Indian economy is now on “auto-pilot” mode and will grow steadily in the range of 6.5% to 7% from this year till 2030, even without any further reforms.

However, we need to accelerate the growth much higher at 8 to 8.5 per cent in the immediate future with further reforms and give momentum to all growth drivers in our quest to become a $ five trillion economy at the earliest.