INFLATION

In an integrated global economy, the shape of the development of the domestic economy in 2024 will, besides local factors, depend upon external sector risks that are more uncertain. The monetary policy of RBI in 2023 broadly witnessed a stable but elevated repo rate at 6.5 percent, standing deposit facility (SDF) at 6.25 percent, marginal standing facility (MSF) at 6.75 percent, and fixed rate reverse repo at 3.35 percent. The stance of monetary policy continued to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.

The inflation oscillated below and beyond the upper end of the target of 6 percent fixed under the flexible inflation targeting (FIT) framework. CPI inflation was 6.52 percent in January 2023 and hit a peak of 7.44 percent in July 2023 and a low of 4.31 percent in May 2023. The food and fuel inflation was the major contributor to the spike in inflation. RBI is well focused on reaching the 4 percent midpoint target of the glide path of inflation of 4 percent +/- 2 percent. The crude oil prices close to US $90 per barrel may also be a threat if its prices increase steeply with OPEC + considering a cut in oil production. WPI at 4.73 percent in January 2023 began to moderate to 3.85 in February. The average WPI– April – November was at -1.34 percent and touched positive at 0.26 percent. Looking at the trend, RBI projected average CPI inflation at 5.4 percent for FY24 and is expected to reach 4 percent in Q1 of FY25 after which RBI may start cutting interest rates.

1. Trends of GDP growth:

The year 2023 began with Q4 GDP growing at 6.1 percent, Q1 of FY24 recording GDP at 7.8 percent, and Q2 of the current fiscal posting GDP growth at 7.6 percent sequentially showing its resilience and continuity of good growth. Economic activity exhibited buoyancy in Q2 aided by strong domestic demand. GDP in Q2 was largely driven by investment and government consumption. Turning to Q3, two-thirds of rabi sowing has been completed despite the late harvest of Kharif crops in some states. The manufacturing sector gained strength with easing input cost pressures and pick-up in demand conditions. Eight core industries recorded healthy growth in October and continued the rising trend since June this year. They grew by 8.4 percent in June; 8.5 percent in July; 12.5 percent in August; 9.2 percent in September; and 12.1 percent in
October. The purchasing managers’ index (PMI) for manufacturing rose in November. The services sector buoyancy has remained intact as reflected in high-frequency indicators. GST collections at Rs.1.68 lakh crore in November 2023 were buoyant. Services PMI displayed healthy expansion in November.

2. Global headwinds:

In the mixed state of equilibrium of growth and inflation in India, external sector developments, persisting supply-side disruptions, and geopolitical risks could impact growth in 2024. Over the next two years, the global economy is expected to slow moderately before returning to near-trend rates. Global growth is projected to weaken to its lowest annual rate in 2024 since the global financial crisis other than the first year of the pandemic. With inflation expected to converge to targets only by 2025, the central banks of major economies may give up their disinflationary stance although the effects of past tightening will linger. Though the US may not enter into recession in 2024, companies and investors, are actively bracing for a slowdown caused by tepid consumer demand. A strong level of prudence and caution is seen from some top companies as they outline their plans for next year.

3. Way forward 2024:

In a recent report, the IMF warned that India’s general government debt may exceed 100% of gross domestic product (GDP) in the medium term, stating that long-term risks are high because the country needs considerable investment to improve resilience to climate stresses and natural disasters. This suggests that new and preferably concessional sources of financing are needed, as well as greater private-sector investment and carbon pricing or equivalent mechanisms.
Given it, the government emphasized a decline in general government debt from around 88 percent in FY21 to approximately 81 percent in 2022-23. It affirmed its commitment to achieving fiscal consolidation targets, aiming to reduce fiscal deficit below 4.5 percent of GDP by FY26.

Sources : Economics Time