The Indian economy is showing signs of recovery after experiencing a slowdown in momentum during the September quarter. According to the Reserve Bank of India (RBI) bulletin released on Tuesday, this recovery is being driven by a combination of strong festival activity and a sustained upswing in rural demand, which has contributed positively to the overall economic activity. The RBI’s article on the "State of the Economy" in the December bulletin also emphasized that the global economy continues to demonstrate resilience, characterized by steady growth and moderating inflation, which further supports the optimism surrounding India’s economic prospects.
The report specifically noted that high-frequency indicators (HFIs) for the third quarter of 2024-25 indicate that the Indian economy is recovering from the slowdown experienced during the second quarter of the fiscal year. The Indian economy, according to these indicators, appears to be gaining momentum, largely due to robust domestic private consumption. With the second half of 2024-25 on the horizon, the growth trajectory is expected to continue upward, underpinned by resilient demand across various sectors of the economy.
Rural demand, in particular, has emerged as a significant contributor to this recovery. The article highlights that rural demand is gaining momentum, supported by a record level of foodgrains production in the country. This surge in rural demand is expected to further support the Indian economy, along with the sustained government spending on infrastructure, which is expected to stimulate both economic activity and investment. The government's infrastructure initiatives are seen as crucial to supporting growth and facilitating long-term economic stability.
However, despite these positive indicators, the article also pointed out several global headwinds that pose risks to India’s economic growth and inflation outlook. These global challenges include uncertainties in international trade, fluctuations in commodity prices, and potential disruptions to supply chains, all of which could influence India’s economic trajectory. The report, authored by a team led by RBI Deputy Governor Michael Debabrata Patra, emphasizes that while India’s economy is recovering, external risks continue to require careful monitoring to avoid negative impacts on growth and inflation.
India’s GDP growth rate had slowed to a seven-quarter low of 5.4% during the July-September period of the current fiscal year, indicating the challenges faced by the economy in the earlier part of the year. The RBI’s article explained that on the expenditure side, fixed capital formation has been a major factor contributing to the decline in growth rates. On the production side, manufacturing has been identified as a key sector of concern, showing signs of weakness that have contributed to the overall slowdown in economic activity. The persistence of inflation has only exacerbated these issues, as the erosion of purchasing power has dampened consumer demand, which in turn has affected corporate sales growth.
Inflationary pressures continue to affect both consumers and businesses, as they result in a reduction in disposable income and higher costs for goods and services. The RBI’s article noted that inflation has had a direct impact on sales growth, particularly among listed non-financial nongovernment corporations, which have been grappling with weaker demand in the face of rising input costs. The continued occurrence of inflation shocks has led to a situation where businesses are increasingly passing on higher input costs to consumers through increased prices, further contributing to the inflationary spiral.
The report further emphasized that inflation is hampering robust capacity creation by businesses. Rather than investing in new fixed assets, many corporations have opted to churn and utilize existing capacity to meet inflation-adjusted consumer demand. This strategy, while addressing short-term needs, has led to a lack of private investment in the economy, which in turn affects long-term growth prospects. The slowdown in consumer demand has also been linked to slower corporate wage growth, with many businesses facing challenges in maintaining profitability while dealing with inflation and reduced consumer spending.
Another key concern highlighted in the bulletin is the slowing rate of nominal GDP growth. A slowdown in nominal GDP growth can have significant implications for government fiscal policies, particularly concerning capital expenditure (capex) and fiscal deficit targets. The article suggests that a slowdown in nominal GDP could limit the government’s ability to increase spending in areas such as infrastructure and social welfare, which are essential for sustaining economic growth and meeting fiscal targets.
Looking ahead, the RBI’s projections for real GDP growth suggest a positive recovery in the coming quarters. Based on projections from the in-house Dynamic Stochastic General Equilibrium (DSGE) model, India’s real GDP growth is expected to recover to 6.8% in the third quarter (Q3) and 6.5% in the fourth quarter (Q4) of 2024-25. For the fiscal year 2025-26, growth is projected at 6.7%, and retail inflation is expected to average 3.8% during the same period. These projections are encouraging, indicating that the economy is likely to regain strength as the year progresses.
In the December monetary policy, the RBI had projected GDP growth for 2024-25 at 6.6%, with Q3 growth expected at 6.8% and Q4 at 7.2%. For 2025-26, the RBI has projected GDP growth at 6.9% in the first quarter and 7.3% in the second quarter. These projections offer a hopeful outlook for India’s economic performance in the near future, although risks from inflation and global factors remain.
The RBI clarified that the views expressed in the bulletin are those of the authors and do not necessarily reflect the official stance of the central bank, indicating that these insights are part of ongoing research and analysis aimed at understanding the evolving dynamics of the Indian economy.
