Downside risks to growth persist

On Thursday, in his post-Budget monetary policy statement, the governor of Reserve Bank of India (RBI) projected for the next financial year (FY25), real GDP growth at 7.0 per cent and the consumer price inflation at 4.5 per cent. The growth projections appear somewhat optimistic given the prospects of export growth, domestic consumption and private investment.

The governor said that India’s potential growth is propelled by structural drivers like improving physical infrastructure, development of world class digital and payments technology, ease of doing business, enhanced labour force participation and improved quality of fiscal spending. While few would contest that statement, the prospects are also marred by certain global and domestic realities.

As the governor said, the global economy continues to present a mixed picture. The odds of soft-landing have increased with inflation moving closer to the target and growth holding up better than expected in major advanced and emerging market economies. However, the ongoing wars and conflicts and the emergence of new flashpoints in different parts of the world, with disruptions in the Red Sea being the latest in the series, impart uncertainty to the global macroeconomic outlook. More pertinent, the consumer sentiment in the US can weaken with their excess savings accumulated during the pandemic running out, the Chinese consumers may hold on to their savings in the wake of the property crisis hurting the demand and consequently the exports from Europe, factory construction may moderate in the US and Europe may continue to struggle. The global trade momentum is still weak and the major central banks remain cautious against premature easing in their fight against inflation. A lot will surely depend on how much more money the US and Europe divert for the war in Ukraine.

For the first time, the RBI flagged global public debt as a risk factor. The Governor said that elevated levels of public debt is raising serious concerns on macroeconomic stability in many countries, including some of the advanced economies. The challenges of debt sustainability in an environment of high interest rates and low growth at the global level can become new sources of stress. So, the risks of exports not doing well are not evenly balanced. Indeed, moderate downside risks persist.

The RBI said that the net foreign direct investment (FDI) stood at  $13.5 billion in April-November 2023 as compared with  $19.8 billion a year ago. The capacity utilisation in the manufacturing sector is only 74 per cent. The rural demand is still weak as the results of the consumer focused companies show. So, although the investment intentions of private entities remain upbeat and both services and infrastructure firms are optimistic about overall business conditions, it is doubtful if they will translate into investments in new projects. Besides, more capital expenditure is going into modernisation that will increase efficiencies rather than green-field or employment intensive projects. So, the economy has to continue to rely on higher capital expenditure by the government.

The government intends to cut the fiscal deficit to 5.1 per cent of the GDP next year. That will necessarily mean cutting its expenditure. The government may raise higher revenues but that will necessarily constrain consumption. To some extent elections may bring in lots of dormant money into the system but their impact could be limited.  So, any optimism about growth should be tempered with due caution. 

Email: tncrajagopalan@gmail.com