‘India on cusp of long-awaited economic take-off’: RBI bulletin

Rising aggregate demand

The RBI’s article on the ‘State of the Economy’ highlighted a quickening momentum in aggregate demand. Recent indicators show that rural demand for fast-moving consumer goods (FMCG) has outpaced urban markets for the first time in at least two years.This surge was driven by robust demand for home and personal care products, resulting in an FMCG volume growth of 6.5%, propelled by rural growth of 7.6% compared to urban growth of 5.7%.

Private investment and corporate earnings

The article, prepared by a team led by RBI deputy governor Michael Debabrata Patra, pointed out that retained earnings remained the major source of funds for listed private manufacturing companies during the second half of 2023-24. The results from listed corporates indicate the highest growth in quarterly revenues for January-March 2024, both year-on-year and sequentially. This robust performance suggests a healthy and expanding private sector, which is critical for sustaining economic growth.

Inflation and economic stability

The RBI bulletin also addressed inflation, noting a modest easing in headline inflation for April 2024. However, it cautioned that the prices of vegetables, cereals, pulses, meat, and fish may keep inflation elevated and close to 5% in the near term, despite deflation in fuel prices and a historic low in core inflation.
“A modest easing of headline inflation in the reading for April 2024 confirmed our expectation that an uneven pace of alignment with the target is underway,” the authors noted. They highlighted the challenge posed by persistent food prices but expressed optimism about a gradual alignment with inflation targets over time.

Global economic outlook

The article also discussed the fragile outlook for the global economy, with inflationary pressures stalling and reigniting risks to global financial stability. Volatile capital flows and risk-averse investors add to the complexity of the global economic landscape, impacting financial markets and investment decisions worldwide.

Economic activity index (EAI)

According to the Economic Activity Index (EAI), which extracts trends from twenty-seven high-frequency indicators, economic activity rebounded in April. This rebound suggests that GDP growth for Q1:2024-25 is likely to remain close to 7.5%. The EAI, scaled to 100 in February 2020 and 0 in April 2020 due to mobility restrictions, underscores the resilience of the Indian economy in the face of geopolitical headwinds and supply chain disruptions.

Government GDP estimates

The government is set to release the quarterly GDP estimates for January-March 2024 and provisional estimates of National Income for 2023-24 on May 31. Previous quarters of 2023-24 showed strong economic growth, with the Indian economy expanding by 8.2% in the June quarter, 8.1% in the September quarter, and 8.4% in the December quarter.

Sustained domestic demand

High-frequency indicators point towards sustained momentum in domestic demand conditions in April 2024. Toll collections increased by 8.6% year-on-year, while automobile sales rose by 25.4% year-on-year, led by strong growth in the two-wheeler and three-wheeler segments. Passenger vehicles recorded their highest-ever monthly sales, reflecting strong consumer confidence and spending.

Optimism for economic growth

“There is a growing optimism that India is on the cusp of a long-awaited economic take-off,” said the article. This optimism is bolstered by rising aggregate demand and a pivot in personal consumption, with Nielsen IQ data indicating a boost in this category. Non-food spending is being pushed up by the green shoots of rural spending recovery, signaling a broad-based economic resurgence.

Inflation dynamics

The Bulletin noted that while statistical base effects might help reduce headline inflation in July and August, a reversal is expected in September. The authors anticipate that a durable alignment with the inflation target may resume in the second half of the year, with numbers closer to the target expected during the course of 2025-26.
(With inputs from agencies)