India’s growth outlook supported by robust domestic engines: RBI article

“In spite of recent geopolitical tensions, India’s growth outlook is supported by robust domestic engines,” the ‘State of the Economy’ article published in the RBI’s October bulletin said.

The article has been prepared by the RBI’s Deputy Governor Michael Patra and other central bank officials. The RBI said the views published in the article are of the authors and not of the institution.

Some high frequency indicators have, however, shown a slackening of momentum in the second quarter of 2024-25. This is partly attributable to idiosyncratic factors like unusually heavy rains in August and September, and Pitru Paksha7 – goods and services tax (GST) collections; automobile sales; bank credit growth; merchandise exports; and the manufacturing purchasing managers’ index (PMI).

In parallel, there are other high frequency indicators which show steady growth, the article said

“In India, aggregate demand is poised to shrug off the temporary slowdown in momentum in the second quarter of 2024-25 as festival demand picks up pace and consumer confidence improves,” it said.

Rural demand is expected to get a boost from the improved agricultural outlook.

The article said that private investment should pick up steam in response to signs of pick-up in consumption demand and rising business optimism.

It said corporate results for the first quarter of 2024-25 had shown a deceleration in real gross value added by non-government non-finance companies. Real investments in plants and machinery remained subdued while net fixed assets have slowed down.

Apparently, the crowding in effect of government capex is lagged. Given the moderation in sales growth, corporates appear to be protecting margins by conserving spending on both raw materials and manpower while delaying an aggressive capex push, the article said.

There is a view gaining ground that the time for private investment is now; delay risks loss of competitiveness.

“The stage is set for the private sector to deploy capital and invest in growth, build capacities, create employment and improve efficiencies,” the article stated.

It further said that with the financial sector ready to intermediate resources for productive investment, buffered by healthy balance sheets, and the government’s continued thrust on capex, the investment outlook appears bright.

“The ongoing strengthening of global trade could provide fillip to external demand for India’s exports although escalation of geopolitical tensions remains a potential threat,” the article said.

As per the World Trade Organization (WTO) goods trade barometer (September 2024), global goods trade has continued to recover in the third quarter of 2024 despite headwinds.

The RBI’s article said that in terms of aggregate supply, above normal rainfall in the monsoon season augurs well for overall kharif production in the country as well as for reservoir storage, which brightens the Rabi season outlook.

The increased likelihood of La Niña conditions developing during the post-monsoon season of 2024 is beneficial for overall precipitation, although the possibility of excessive rainfall damaging the standing kharif crops remains a risk.

It said that the country’s external sector is showing resilience despite rising geopolitical tensions. The innate strength of India’s external sector lies in its strong macroeconomic fundamentals, supported by high foreign exchange reserves, the article said.