Opinion Express View on inflation report: Managing growth

The GDP growth estimates released by the National Statistical Office at the end of February had shown that the Indian economy grew at 8.4 per cent in the third quarter, surpassing the most optimistic projections. They implied that the economy had grown at an average of 8.2 per cent in the first three quarters (April-December) of the year. For the full year, the NSO had projected the economy to grow at 7.6 per cent. However, excluding net taxes on products, growth in gross value added by all sectors in the economy had slowed down from 8.2 per cent in the first quarter to 7.7 per cent in the second quarter and further to 6.5 per cent in the third quarter. This raised questions over the underlying momentum in the economy. Now, a study on the state of the economy prepared by economists at the Reserve Bank of India suggests that the growth momentum remains healthy. The study pegs growth for the fourth quarter (January-March) at 7.2 per cent. This is higher than the 5.9 per cent growth implied in the NSO’s estimates. A higher growth would, in turn, mean that the economy is likely to grow at closer to 8 per cent in 2023-24, higher than the NSO’s assessment. Further, the study projects growth for the next year (2024-25) at 7.4 per cent, higher than the RBI’s forecast of 7 per cent presented in the last monetary policy committee’s meeting. This is good news.

However, despite this healthy momentum, private consumption remains subdued, growing at just around 3 per cent. There are pointers to a continuing unevenness in demand across various consumption segments. For instance, there are indications of the FMCG sector witnessing moderate growth, even as premium consumer businesses remain robust. This, as the study also points out, implies that there are “significant per capita income shifts underway”. On investment activity, while capital expenditure by governments, in both Centre and states, has been steady, and bank and corporate balance sheets are healthy, there are questions over a broad-based revival in private capex. More so, when the capacity utilisation rates in several segments have reached levels at which new investments are called for.

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The study notes the divergence between food and core inflation. Food inflation had edged upwards to 8.66 per cent in February, while core inflation had moderated to 3.4 per cent as per estimates. Inflation remained elevated in cereals, eggs, vegetables and pulses, while it eased across various non-food and non-fuel segments. This poses a dilemma for monetary policy at a time when the global economy is losing steam. According to the report, the momentum in global growth slowed down in the first quarter of 2024, the global supply chain pressures index saw an uptick, and geopolitical risks remain heightened. This uncertain economic environment requires deft policy management.