Indian Economy’s Growth and Inflation Challenges

Weighing in on India’s slowing growth and high inflation conundrum, senior Reserve Bank of India (RBI) officials asserted that the “time to act is now to excoriate inflation and revive investment strongly”, even as they believed the growth trajectory is poised to lift in the second half of the year.

Key Observations

Economic Growth Trajectory

• Current Challenges: India’s GDP growth in Q2 2024-25 slipped to 5.4%, driven primarily by private consumption and fixed investment. The momentum, however, was weighed down by inflation-induced pressures.
• Signs of Recovery:
• Early indicators for Q3 2024-25 suggest an upswing:
• Festival-related economic activity.
• A noticeable revival in rural demand.
• Growth is projected to rebound to 6.8% in Q3 and 6.5% in Q4.
• Future Outlook: GDP growth is forecast to average 6.7% in 2025-26, underpinned by resilient private consumption.

Inflation Dynamics

• Recent Trends: Retail inflation eased from 6.2% in October to 5.5% in November, aided by declining food prices. However, the relief is uneven:
• Rice prices have fallen, but wheat and atta prices remain firm.
• Edible oil continues to face upward price pressures.
• Prices of onions and tomatoes have dropped, while potatoes remain steady.
• Input Cost Pressures: Across both manufacturing and services sectors, input costs hardened in November, leading to the steepest price increases in over a decade. Firms, facing rising costs, are increasingly inclined to pass these on to consumers.

Key Challenges

• Weakening Consumer Demand: The repeated inflation shocks have significantly eroded purchasing power, reflecting in subdued sales growth for corporations and sluggish demand conditions.
• Private Investment Hesitation: A lack of robust private investment is evident, as firms rely on existing capacity rather than committing to capacity expansion amid uncertain demand.
• Fiscal Constraints: A slowing nominal GDP growth rate threatens to constrain fiscal spending, including capital expenditure, complicating efforts to meet deficit and debt targets.
• Global Risks: Geopolitical tensions, rising protectionism, and debt overhangs present risks to emerging market economies (EMEs).
  • Currencies and equity markets in EMEs remain vulnerable to volatility in global trade and capital flows.

Policy Recommendations

• Target Inflation Aggressively: Timely interventions are necessary to prevent inflation from undermining industrial and export growth, especially as seasonal relief from food prices sets in.
• Focus on Investment Revival: Creating conditions for capacity expansion and fixed asset investment is critical to stimulate economic activity and enhance long-term growth prospects.
• Support Private Consumption and Exports: Measures to accelerate private consumption and bolster exports could reinforce economic resilience.