Mumbai: Several high-frequency indicators for the third quarter of the current financial year show that the Indian economy is recovering from the slowdown in momentum witnessed in the previous three months ended September, according to a paper in the Reserve Bank of India’s (RBI) monthly bulletin.
The recovery in Q3 of FY25 is being driven by strong festival activity and sustained upswing in rural demand and consumption on the back of brisk expansion of rabi sowing and positive prospects for the agriculture sector, said the ‘State of the Economy’ paper in the RBI’s bulletin for December.
“India’s growth trajectory is poised to lift in the second half of 2024-25, driven mainly by resilient domestic private consumption demand,” it said. “Supported by record level foodgrains production, rural demand, in particular, is gaining momentum. Sustained government spending on infrastructure is expected to further stimulate economic activity and investment."
India’s economic growth slowed to a seven-quarter low of 5.4% in the second quarter of FY25, down from 8.1% a year earlier and 6.7% in the previous quarter.
Expectations around India’s resilient growth trajectory are also coalescing with “more sustainable underpinnings in view of positive climate action” given the increased policy focus on renewable energy, electric vehicles (EVs), green hydrogen, and steps towards institutionalizing the carbon market, said the paper authored by deputy governor Michael Debabrata Patra along with several other RBI officials. The views expressed in the article are those of the authors and not of the RBI.
“These concerted efforts indicate a promising path toward achieving net-zero emissions. Leveraging global frameworks for carbon trading and scaling climate finance, including green bonds, will further reinforce decoupling of growth and emissions.” it said, adding that India is also riding the wave of digitalization to boost growth, improve productivity and enhance the reach of products and services.
The digitalization has been spurred by shifts in consumer behaviour and the deepening reach of online shopping, particularly in smaller towns, and underscores a growing investor confidence and “momentum in India’s FinTech ascendency”, it added.
The paper cautioned that global headwinds, however, continue to pose risks to the evolving outlook for growth and inflation.
“Challenges persist in the form of ongoing geopolitical tensions, concerns over growing protectionism and a large public debt overhang. These developments have adverse implications for emerging market economies (EMEs), with their currencies and equities vulnerable to the sharp bouts of declines seen in 2024 in a highly uncertain environment for trade and capital flows,” the paper said.
The paper said that the November data releases of real GDP, gross value added (GVA) and CPI inflation for Q2 FY25 "confirmed (the) apprehensions in the November issue of the State of the Economy, reprising the dilemma of a slowing growth-high inflation conundrum”.
Headline CPI inflation moderated to 5.5% in November 2024, falling within the RBI’s target band of 2-6% led by easing food prices and a favourable base effect. The inflation figure moderated from 6.2% in October 2024. Food inflation continued to be elevated but eased to 8.2% in November 2024 from 9.7% whereas core inflation eased to 3.7% from 3.8% in October.
The major factors contributing to the decline in the growth rate of the economy is fixed capital formation and manufacturing, both of which are being undermined by high inflation and repeated inflation shocks which are leading to erosion of purchasing power due to persistent price pressures. This is being reflected in weakening sales growth of listed non-financial non-government corporations, whose demand outlook remains subdued given no let-up in the incidence of price shocks.
“They will increasingly be inclined to pass on input costs to selling prices. Consequently, there is no robust capacity creation by investing in fixed assets,” the RBI said. “Instead, corporations are churning and utilising existing capacity to meet the inflation-dented consumer demand. The result is lacklustre private investment.”
It added that the slowdown in consumer demand seems to be associated with slower corporate wage growth, made worse by the slowing rate of nominal GDP, which could hinder fiscal spending, including on capex, to achieve budgetary deficit and debt targets.
“If inflation is allowed to run unchecked, it can undermine the prospects of the real economy, especially industry and exports,” the paper said. “The time to act is now to excoriate inflation and revive investment strongly, especially as the usual winter easing of food price is setting in and the prospects of private consumption and exports accelerating are getting brighter.”
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