Inflation

India ‘must prioritise inflation over growth

India’s central bank should prioritise reducing inflation to the mandated range of 2%-6%, even if it harms economic growth, according to Finance ministry officials.

“The central bank should focus on combating inflation until it is within the tolerance level of 6%, even if it pares (down) growth,” a senior government official told Business Standard. He said that high inflation could have an impact on the low-income sectors of society.

Retail inflation, which is used by the Reserve Bank of India (RBI) for policy-making, fell slightly in February to 6.44%, down from 6.52% in January.

Core inflation

– which excluded volatile food and fuel inflation and a key concern for the RBI — has remained above 6% in recent months.

The RBI has a mandate to keep retail inflation at 4% within a band of two percentage points on either side.

The official added that the basics of India’s economy were sound. “Revenue collection has shown strong momentum – both on direct and indirect taxes. Even the bank’s balance sheet looks good,” he said.

Direct tax collection rose 17.63% to Rs 16.61 trillion (£163bn) in 2022-23 (FY23), marginally exceeding the target figure, provisional data released by the finance ministry shows. Additionally, the goods and services tax collection in FY23 grew 22% to Rs 18 trillion.

However, the official added that the central bank needs to pay attention to inflation. The RBI expects retail inflation to average 5.3% in 2023-24 (FY24), with the first quarter at 5%. He said that while it has projected inflation for the January-March quarter of FY23 at 5.7%, experts believe inflation rises are not over and the said quarter may see average inflation of 6.3%.

Higher inflation has been a concern for central banks the world over, including India, due to uncertainty in the midst of the Russia-Ukraine war causing supply-side disruptions in a world still recovering from economic shocks inflicted by the pandemic.

The US Federal Reserve has recently hiked rates by 25 bps, keeping the focus on inflation in the face of the upheaval in the US banking sector.

 

World Bank lowers India’s growth forecast to 6.3%

The World Bank has cut its forecast for growth in India’s GDP to 6.3%, compared with its estimate of 6.6% in FY24 (2023-24), citing high borrowing costs and slower income growth among reasons for the downgrade.

“In India, South Asia’s largest economy, high borrowing costs and slower income growth are expected to dampen consumption and lower growth to 6.3% in FY 2023/24,” the World Bank said in a report for South Asia released ahead of the annual spring meeting of the International Monetary Fund and the World Bank.

“The main reason for the downgrade of the forecast is weak consumption, and also tightening of fiscal policies, and especially tightening of the current expenditure by the government. Domestic consumption is held back by the tighter fiscal situation,” Hans Timmer, World Bank Chief Economist for South Asia.

The report noted that the situation in India is better than in many of the other countries in South Asia. The country’s in the financial sector is healthier than many other countries in the region. The banks in India are in good shape and they have improved after the pandemic, there is healthy credit supply in the economy and private investment is relatively strong compared to recent years, Timmer said.

The main challenge in India, the World Bank economist said, is that it is not inclusive enough, and its potential was not being realised.

“In India female labour force participation has dropped below 20%. There is also no sign that the informal sector is becoming more productive or becoming smaller. So, there is still a huge structural agenda in India to make growth more inclusive to increase participation,” he said.

“There’s also still a reform agenda needed to increase private investment from abroad, especially in the services sector,” he said, adding that there is also the challenge of climate change in India to prepare for the changing climate and to play its role in mitigating global emissions. “But in the short run, India has a healthier economy than in the rest of South Asia,” Timmer said.

All countries in the region except Bhutan have downgraded their economic forecasts, the World Bank said in its report.