India’s forward economic momentum ‘to continue into 2024’

India’s growth is likely to continue in 2023-24, according to the annual report from the Reserve Bank of India (RBI), although it also warned of challenges including slowing global growth, geopolitical tension and a possible upsurge in financial market volatility.

As a result of these potential pitfalls, the RBI is recommending structural reforms to help achieve sustained growth in the medium-term.

“Amidst strong global headwinds, the Indian economy is expected to have recorded a growth of 7%in real GDP in 2022-23,” it said.

A sustained recovery in discretionary spending, the bounce-back in consumer confidence, increased festival season spending after two years of Covid-19 restrictions and the government’s drive on capital expenditure all helped to boost growth.

In the second half of the last fiscal year, however, the pace of year-on-year growth moderated because of weakening private consumption spending caused by high inflation, the slowdown in export growth and sustained cost pressures, it said.

“On the back of sound macroeconomic policies, softer commodity prices, a robust financial sector, a healthy corporate sector, continued fiscal policy thrust on quality of government expenditure, and new growth opportunities stemming from global realignment of supply chains, India’s growth momentum is likely to be sustained in 2023-24 in an atmosphere of easing inflationary pressures,” the report said.

However, it said sluggish global growth, geopolitical tensions including the war in Ukraine and a possible financial market volatility could pose risks to growth.

“It is important, therefore, to sustain structural reforms to improve India’s medium-term growth potential,” the 311-page report said.

The RBI also said India’s monetary policy will continue to be guided by the objective of achieving the medium-term target for Consumer Price Index (CPI) inflation of 4%, while supporting growth.

Predicted FY24 GDP growth

In its report, the RBI pegged India’s GDP growth for FY24 at 6.5%, in line with its previous predictions.

The RBI acknowledged that the domestic could be affected by the global economic outlook, it said strong macroeconomic factors, financial conditions and expected dividends from past reforms put the country in an advantageous position.

The Bank said inflation “has moderated with downward corrections in global commodity and food prices and easing of the pass-through from high input cost pressures of last year”, adding that recent rises to interest rates had had a deflationary effect.

“With a stable exchange rate and a normal monsoon – unless an El Nino event strikes – the inflation trajectory is expected to move down over 2023-24, with headline inflation edging down to 5.2% from the average level of 6.7% recorded last year,” the RBI said.

“Monetary policy remains focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth,” it said.

The central bank went on to highlight that its March 2023 consumer confidence survey revealed that the current situation is “perceived by consumers to have improved on account of optimism in the general economic situation and in household income”.

“Future expectations also remain positive. Households’ spending on non-essential items is expected to rise over the year ahead,” RBI added.

It added in its report that the continuing growth in credit, especially housing and personal loans, reflected steady domestic household demand as well.

It also noted that even after the recent financial sector turmoil that led to the collapse of banks in the US and one major bank in Europe, the domestic banking sector remains resilient.

The RBI said the recent banking turmoil has necessitated the need to reassess risks to the financial stability and resilience of financial institutions in the context of monetary policy tightening.

It said while “Indian banks and non-banking financial intermediaries remain sound and resilient”, they need to stress-test for any future shocks.

“Capital buffer and liquidity position, therefore, must be constantly reviewed and strengthened. Accordingly, policy measures, such as guidelines on introduction of expected loss-based approach for provisioning, are likely to be announced during 2023-24,” RBI predicted.