The Indian economy is slowly but surely recovering from the hit caused by the pandemic and European war but there is still no room for complacency, the Reserve Bank of India staff said on May 22.
“An environment of low and stable prices is necessary for strengthening the foundations and resilience of this recovery. Eternal vigil with a readiness to act is its price,” the staff, which included RBI Deputy Governor Michael Patra, wrote in the State of the Economy article in the latest central bank bulletin.
“On this, a final ‘refrain’ in the poetic sense of the word – we can do no better than quote the words of Governor, Shri Shaktikanta Das: “We remain firm and resolute in our pursuit of price stability which is the best guarantee for sustainable growth”.”
India is expected to be the fastest-growing major economy globally.
Growth in the first quarter of 2023-24 may be at 7.8 percent year-on-year, according to RBI’s projections, which works out to 13.7 percent above its pre-pandemic level, according to the article. The RBI pegs the full year growth at 6.5 percent.
The RBI’s rate-setting panel in April kept its key policy rate unchanged at 6.5 percent after raising it sharply over the last 12 months as it withdrew pandemic-era stimulus and sought to curb red-hot inflation, which is now declining.
With a gradual normalisation of the hit from the pandemic and the Russia-Ukraine war setting in, growth in the first quarter of 2023-24 could be driven by private consumption, supported by a revival in rural demand that is underway on the back of the encouraging developments in both the kharif and rabi seasons, the sustained buoyancy in services, and the moderating inflationary pressures, the RBI staff said.
Meanwhile, the investment activity is also expected to improve, drawing strength from the thrust on capital expenditure in public spending and moderation in commodity prices, it added.
Private capital spending will need to get stronger to add additional capacity as demand picks up, as capacity utilisation in manufacturing is at trend levels and above it in some industries, according to the article.
“The manufacturing sector as a whole is expected to gain from softening input cost pressures. If services exports maintain their recent high profile, the drag from net external demand should moderate through April-June 2023,” it added.
The external sector and weather-related uncertainties pose downside risks to growth and upside risks to inflation, the Finance Ministry said in its latest monthly economic review.
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