The Annual Report of the RBI for the year ended March 31, 2024 has given its observations about the prospects of the Indian and global economy based on the assessment of the recent scenario. Just as every coin has two sides, the RBI seems to be considering the favorable factors, giving strength to the global and Indian economy on one hand, and also the challenges that pose risks to them, on the other, while making assessment and charting out the prospects for the Indian economy.
Global economy resilient amid challenges
One such observation is about inflation, which is easing in major systemic economies. Global inflation fell to 6.8 per cent in 2023 from 8.7 per cent in 2022 on the back of easing of commodity prices, favorable supply conditions and monetary tightening across major economies. Yet, inflation remains above target in most such economies and sticky core and services inflation and tight labor markets are impeding chances of further disinflation.
Secondly, global growth is reported to have decelerated to 3.2 per cent during 2023 from 3.5 per cent during 2022. The major reasons are:
- restrictive monetary policy stances taken by several economies to tame inflation,
- prolonged geopolitical tensions
- sluggish recovery in China.
- economic losses due to extreme weather events.
Thirdly, global merchandise trade volume decreased by 1.2 per cent in 2023 as against an increase of 3.0 per cent in 2022 even as demand for services increased due to of the weakening of the pandemic effects and increased access to digitally delivered services. However, global trade volume (goods and services) is expected to recover with a growth of 3.0 per cent in 2024 and 3.3 per cent in 2025 from 0.3 per cent in 2023, with easing inflation and the expected rebound in goods trade.
Fourthly, synchronized monetary policy tightening measures by the majors economies (both in the advanced and emerging ones), only aggravated volatility in the financial markets and hardening of sovereign bond yields and all this became worse due to continuance of geopolitical conflicts with no obvious signs of getting resolved. However, the US dollar remained strong, even amidst huge swings in tandem with changing monetary policy expectations. But at the same time, it exerted downward pressures on a number of EME currencies.
Lastly, it could be surprising to many, the global equity markets, despite all odds or even good things being delivered or received with ‘conditions apply’ tags rallied past their previous record levels in many instances as the outlook remained positive indicating a better possibility of soft landing, inflation persistently moving within the target bands and bright prospects of technology and artificial intelligence (AI) related stocks.
Indian economy performed nicely in 2023-24
In the backdrop of several risks posed to the global economy, in general, the Indian economy has rather been exhibiting signs of strength and stability with robust macroeconomic fundamentals and financial stability. It is considered as the fastest growing major economy in the world and has established itself as a leading contributor to global growth.
Despite subdued global economic activity and multiple headwinds, the Indian economy expanded at an impressive pace at 7.6 per cent in 2023-24 as compared to 7.0 per cent last year. This is the third successive year of 7 per cent or above growth for the Indian economy. The major assessments are as under:
Firstly, the inflationary pressures are abating, led by steady core disinflation and deflation in fuel prices due to calibrated monetary tightening, easing of input cost pressures and supply management measures. During 2023-24, the combined impact of Headline inflation softened to 5.4 per cent from 6.7 per cent in the previous year, driven by the fall in core inflation (CPI excluding food and fuel) from 6.1 per cent to 4.3 per cent. However, the food inflation continues to be vulnerable due to recurring supply shocks posing challenges to the RBI pursuits of bringing inflation closer to the lower threshold of the tolerable range of inflation. But the good thing is that fiscal consolidation is progressing along with an improvement in the quality of fiscal spending and adjustment.
Secondly, the Current Account Deficit (CAD) is narrowing and the foreign exchange reserves are rising up to record levels. The Indian Rupee (INR) displayed stability on the back of improvement in the external sector and other macroeconomic fundamentals. The INR depreciated by 1.4 per cent during 2023-24 compared with 7.8 per cent in the previous year and it was amongst the best performing major EME currencies during the year.
Thirdly, the financial sector is sound and vibrant, supporting double digit credit growth, backed by high capital adequacy, solid earnings, and improvements in asset quality. During the year 2023-24, the domestic financial markets remained stable. Equity prices recorded solid gains on robust corporate earnings and strong domestic GDP growth. The domestic equity market capitalization crossed the US$ 4 trillion mark in the second half of the year 2023-24, making the Indian stock market the fifth largest in the world.
Fourthly, the unemployment rate declined in both the urban and rural regions to its lowest level during 2023 (January-December) at 3.1 per cent in the usual status. The labor force participation rate (LFPR) and worker population ratio (usual status) increased to 59.8 per cent and 58.0 per cent, respectively, in 2023, which was the highest since the survey’s inception, along with a steep rise in the female LFPR.
Fifthly, India’s climate action performance improved, making India the fourth best performing nation among 63 countries analyzed. Strong progress was reported in terms of key indicators like reduction in the emission intensity of GDP and an increase in the installed capacity of non-fossil fuel-based energy resources. Among major climate initiatives, India notified the carbon credit trading scheme (CCTS) while also launching the National Green Hydrogen Mission.
Monetary Policy remained focused on reducing inflation
The Monetary Policy Committee of the RBI kept the policy repo rate unchanged at 6.50 per cent during 2023-24 and continued with a stance of withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth through fuller transmission and better anchoring of inflation expectations.
As a result, the Liquidity conditions tightened during 2023-24. The liquidity surplus as reflected in average daily net absorption under the liquidity adjustment facility (LAF) reduced to ₹485 crore during 2023-24 from ₹1.87 lakh crore in the previous year.
Fiscal consolidation reached new heights
As per the revised estimates, the gross fiscal deficit declined to 5.9 per cent of GDP in the year 2023-24 from 6.4 per cent of GDP in 2022-23. While the Revenue spending grew at 2.5 per cent, capital expenditure grew in double digits for the fourth consecutive year. Revenue income was buoyant as gross tax revenues increased to 11.7 per cent of GDP in 2023-24 to their highest level since 2008-09, driven by improved income tax collections. States’ gross fiscal deficit in the year 2023-24 at 3.1 per cent of GDP which was less than the limit of 3.5 per cent prescribed by the Centre .
Digital Payments marked remarkable growth
In 2023-24, total digital payments recorded growth of 44.3 per cent and 16.4 per cent in volume and value terms, respectively. The UPI platform achieved significant milestones, surpassing 13 billion transactions in a single month in March 2024. There was notable reduction in the time taken to add another billion to its tally plus the average ticket size also decreased and this signifies the the pivotal role played by UPI in facilitating retail payments through innovation and deeper penetration.
Financial Inclusion Index improved
The Reserve Bank’s Financial Inclusion Index (FI-Index), a measure to assess the extent of financial inclusion in the country in terms of access, usage and quality improved from 56.4 in March 2022 to 60.1 in March 2023 reflecting deepening of financial inclusion.
To sum up, the Indian economy has shown a remarkable performance in the light of an otherwise adverse global macroeconomic and financial environment posed to it. Its real GDP growth is robust due to several positives on the domestic turf such as solid investment demand which is supported by healthy balance sheets of banks and corporates, the government’s focus on capital expenditure and prudent monetary, regulatory and fiscal policies.
Besides, as the headline inflation eases towards the target, it will spur consumption demand especially in rural areas. The growing strength of the external sector coupled with buoyancy in the foreign exchange reserves is likely to insulate domestic economic activity from global spillovers.
However, continuing geopolitical tensions, geo-economic fragmentation, global financial market volatility, international commodity price movements and erratic weather developments may continue to put pressure on the growth outlook and pose upside risks to the inflation outlook. The Indian economy may also have to grapple with the medium-term challenges posed by rapid adoption of AI/ML technologies and recurrent climate shocks.
Even if we assess the potential impact of the risks posed to the Indian economy, it seems to be comfortably positioned as of now, and is likely to step-up its growth trajectory over the next decade in an environment marked by macroeconomic and financial stability and seems well poised to achieve its developmental aspirations by reaping its demographic dividend and exploiting its competitive advantages that have placed it as the fastest growing major economy of the world.