The Reserve Bank of India's (RBI) upgrade of real GDP projections from 6.5 percent to 7.0 percent has raised the potential of faster economic growth. Though the revised GDP forecast for 2023-24 is slightly lower than the 7.2 percent forecast for 2022-23, it shows a significant upward trend, which is a very promising indicator. The Indian economy recovered quickly from a 5.8 percent decline in 2020-21, with growth of 9.1 percent in 2021-22 and 7.2 percent in 2022-23.
The RBI projected real GDP growth of 6.5 percent in both 2023-24 and 2024-25 at the start of the year. V Anantha Nageswaran, the Chief Economic Advisor, stated in September that the Indian economy is expected to grow at a 6.5 percent yearly rate between 2023 and 2030. Will the Indian economy maintain its 7%-plus growth rate in the next few years? There are several threats that could derail the current trend.
Inflationary Pressures and Rising Interest Rates
With a 250 basis point increase in the repo rate, the monetary transmission is still working its way through the economy. This is what RBI Governor Shaktikanta Das has recently stated. Households are already suffering the effects of rising prices and borrowing rates. Inflation remains outside the RBI's comfort zone of 4 percent, which is the Monetary Policy Committee's (MPC) target for long-term economic growth. CPI inflation is expected to be 5.4 percent in 2023-24, with 5.6 percent in Q3 and 5.2 percent in Q4.
Assuming a regular monsoon next year, CPI is expected to be 5.2 percent in Q1:2024-25, 4.0 percent in Q2, and 4.7 percent in Q3. The Governor stated that the unpredictability of domestic food inflation, as well as volatility in crude oil prices and financial markets, pose threats to the inflation outlook in an uncertain international environment.
Greater Risk Weights
The RBI is also concerned about overheating in certain retail areas. The RBI raised the risk weights in unsecured loans and bank funding to NBFCs last month. This change has increased the capital allocation requirement for unsecured banks and NBFCs. Higher delinquencies have also been reported in the small loan market. Many companies are already limiting their future expansion in these retail categories. Indeed, MSMEs, business loans, and other areas are growing faster than usual, which may draw the attention of the RBI in the future.
Government Capital Expenditures will be Reduced
Following the pandemic, the fiscal deficit increased to 9.3 percent of GDP in 2020-21, creating fiscal leeway to spend more in succeeding years. In 2021-22, the budget deficit was 6.7 percent, and in 2022-23, it was 6.4 percent. As a result, the government's spending surpassed Rs 10 lakh crore. However, this fiscal flexibility is steadily reducing as the government pursues fiscal reduction, with a 5.9 percent fiscal deficit forecast for 2023-24. The administration has defined a glide path for the deficit of 4.5 percent by 2025-26. In terms of the percentage share of GDP flowing to government capex in the next years, this will significantly cut government capex.
Private Capital Expenditure has yet to Increase
Banks and corporations are enjoying one of their best years in terms of asset quality, capital, cash on hand, and deleveraging. However, private capital investment is not picking up as quickly as expected. Large corporations are spending, but it is not ubiquitous because capacity utilisation remains around 70%. As government capital spending is predicted to slow, a surge in private capital spending would boost growth momentum, but this is not happening. The global economic slowdown is also a factor, as business entities adopt a wait-and-see attitude.
Navigating Geopolitical Difficulties
Finally, geopolitical tensions are creating an unpredictable environment for the financial sector. The Russia-Ukraine crisis and the Israel-Hamas conflict have both had an influence on supply chains and prices. Some impact is already obvious in the form of currency depreciation and dollar strengthening. According to the Governor, emerging market economies (EMEs) continue to suffer erratic capital flows.
