2

Mar

Robust Growth Rate Marred By High Inflation

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Today’s Edition

New Delhi, 2 March 2024

Prof. Shivaji Sarkar

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India is experiencing a robust growth rate of 8.4 percent, paralleled by rising inflationary trends, sparking concerns within the Reserve Bank of India (RBI). Projections of economic ease appear optimistic, prompting questions about whether inflation might impede growth or if capital expenditure (capex) could bolster it.

However, key concerns linger, including a dip in core sector growth and a contraction of the farm sector by 0.8 percent, compared to the previous expansion of 5.2 percent in the third quarter of 2022-23. Despite a notable rise in manufacturing by 11.6 percent, following a contraction of 4.8 percent in the preceding year, challenges persist. Despite substantial government capex, consumption growth remains feeble, private investment continues to lag and constructions may be a drag.

India’s claim of growth is accompanied by decadal cumulative inflation of 55 percent at 5.5 percent a year. Rural inflation at 5.93 percent is far higher than the urban at 5.69 percent as in December 2023. And less noted vegetable inflation has touched 9.94 percent.

The RBI is cautious in its observations but International Monetary Fund is blunt on high core inflation and stresses that central banks need to keep monetary policy tighter for longer than is current in markets. It says, in its Global Financial Stability Report, “risks to global growth are skewed to the downside as the global credit cycle has started to turn as borrowers’ debt repayment capacity diminishes”.

India needs to heed to the warning. Despite RBI remaining tight fisted, it notes at the Monetary Policy Committee report of this February that since February 2023 it has not succeeded in its effort to check prices. It means government has to be careful on burgeoning borrowings. The country’s allocation for debt repayment of Rs 10 lakh crore or almost 25 percent of the central budget skews the economic focus. The quarterly GDP growth figures touching 8.4 percent in third quarter against the Bloomberg estimates of 6.6 percent, projected as fastest in 18 months, portrays one side of the picture as simultaneously the core sector growth slips to 3.6 percent, a 15-month low in January.

Latest data show eight core sectors grew slower than 4.9 percent in December and 9.6 percent in January 2023. The core sector consists of 41 percent of the index for industrial growth.

An increased government capital expenditure outlay may do little to change the overall investment situation as most of private firms remain reluctant to invest more. Margins for companies have plummeted despite high sales growth and it is apprehended that sales would decelerate.

Compared to the 1980s when capex was high at 55 percent, a study by Systematix group denotes, the present contribution is on the rise at 34 percent. It is, however, concentrated on construction activities. It does not have multiplier effect on the industrial sector. This affects private investment growth, an aim of the higher public investments. A handful of companies with better liaison are pocketing the capex extravaganza. Actual demands remain low as core sector figures denote.

The consumers may have to pay higher prices for natural gas after the elections adding to further inflationary trends. The government has raised natural gas prices to $8.2 per unit – million metric British thermal units. For consumers the cap remains at $ 6.5 in the current price mechanism when the Indian basket, was linked in April 2023. It is meant for international sale by domestic producers.

Over Rs 10 lakh crore projects have been announced in election meetings by Prime Minister Narendra Modi in UP and over a billion more for schemes in West Bengal, Chhattisgarh, Tamilnadu, other states, schemes for railways and other areas. The rail projects are linked to construction of railways stations and similar other facilities.  Faster trains fascinate but are concerns for connectivity in hinterlands.

Promises are encouraging. Overall investments have grown on heavy borrowings of Rs 172.37 lakh crore as on March 2024, estimated to rise to Rs 187.35 lakh crore on March 31, 2025. This has a cost push effect. The RBI notes that over the past decade until 2022, consumer price inflation in India averaged 5.5 percent a year or 55 percent in a decade. This was above the Asia-Pacific’s figure of 2.1 percent.

The Indian Institute of Management, Ahmedabad, conducted Business Inflations Survey (BIES) in December 2023, mainly among the manufacturing companies, reports a significant increase in one-year unit cost-based expected headline inflation. It reports an increase of 4.96 percent in December 2023 from 4.73 percent October 2023.

The latest MPC notes that with elevated levels of food inflation, there is need to remain focussed on achieving the inflation target in a sustained way. It also observed that it could not achieve its target set in February 2023 implying the central bank could not contain prices. Prices of vegetables, including omato, garlic, lemon and ginger and food grain have shot up. It affects overall costing of all the government estimates. Overall, it dampens the growth efforts.

Promising investments to the people that is unsustainable have deleterious effect on the economy. Debt pushed investments raise money circulation further spiking prices. The populism may cause euphoria but gains to the economy are uncertain. It could, as the RBI indicates, be deceptive. Revival of growth in consumption demand is the key and “would require improved employment and household income conditions.

The consumer optimism, increased spending, as per RBI urban household survey January 2-11, 2024 is yet to reach pre-covid19 period”.  The RBI stresses that jobs and household income rise are key to the growth of the country whatever might be the euphoric figures of it being the fifth or third world economy. The consumer is constrained by the gap in discretionary spending that is the freedom of purchasing the goods of their choice.

This is also reflected in foreign direct investment (FDI) as a percentage of GDP being restricted to 2-2.5 percent of GDP, which is hardly sufficient as also hot volatile money. This could be an indication that foreign companies are circumspect.

The country has to check inflation as it diminishes the purchasing power of individuals that can’t cope up with unaffordable goods, services or essential items as also constructions that could add to post-poll prices. Prudent economic policies are necessary for sustaining growth and job creation. Supposed global standings epaulets hardly help.(Words 1065)

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