MUMBAI: Increased private investments are necessary to drive growth while a disinflationary stance will continue to take care of the spillover effects of high food prices, according to the assessment of the state of the economy by the Reserve Bank of India economists. This, in turn, could delay the rate cut cycle even if the consumer price inflation touches the target level, they said.
The economists have called for a strong revival of private investments in the economy which has for long been supported by government-led capital expenditure.
“A strong revival in private investment has to become the most important factor driving growth in the years to come, especially as public finances consolidate,” said an assessment of the state of the economy by RBI deputy governor Michael Patra and his team, published in the latest Reserve Bank of India Bulletin. The views are not necessarily that of the central bank.
Government consumption spending picked up modestly towards the close of 2023-24, reflecting the sustained focus on capital expenditure, which is a positive for the medium-term prospects of the economy and investor sentiment, according to the report. The real GDP is estimated at 8.2% in 2023-24 compared to 7% in 2022-23.
More recent indicators suggest that private consumption is resuming its role as the main driver of demand and is getting broad-based to include rural consumers. The fast-moving consumer goods sector is gearing up for a strong turnaround on expectations of a pick-up in public welfare spending.
A drop in walk-in clientele is being compensated for by e-commerce platforms, especially in heatwave conditions, according to the report. Investment has maintained steady growth though some moderation in the more recent period could be on account of transitory uncertainty weighing on investment decisions, the authors said.
As for inflation, although headline inflation is gradually easing, driven by the softening of core inflation, “the path of disinflation is interrupted by volatile and elevated food inflation which may cause it to reverse after a temporary fall below the target (of 4%) during the second quarter of 2024-25”, the report said.
This implies that the Monetary Policy Committee may not consider a reduction in the policy rate even if inflation touches the target level of 4% unless the target is sustained on a durable basis. The RBI had kept the policy rate untouched at its June 6 meeting.
“Consequently, a resolute commitment to a durable alignment of headline inflation with the target will warrant careful monitoring of spillovers from food price pressures to core inflation and inflation expectations. This necessitates a continuation of the disinflationary stance.” the authors said.
Source: The Economic Times