Core, Farm slip; Prices Up
By Shivaji Sarkar
India is experiencing a robust growth rate of 8.4 per cent, 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 per cent, compared to the previous expansion of 5.2 per cent in the third quarter of 2022-23. Despite a notable rise in manufacturing by 11.6 per cent, following a contraction of 4.8 per cent 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 per cent at 5.5 per cent a year. Rural inflation at 5.93 per cent is far higher than the urban at 5.69 per cent as in December 2023. And less noted vegetable inflation has touched 9.94 per cent.
The RBI is cautious in its observations, but the International Monetary Fund (IMF) is blunt on high core inflation and stresses that central banks need to keep monetary policy tighter for longer than is current in markets. In its Global Financial Stability Report, it says “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 per cent of the central budget skews the economic focus. The quarterly GDP growth figures touching 8.4 per cent in third quarter against the Bloomberg estimates of 6.6 per cent, projected as fastest in 18 months, portrays one side of the picture as simultaneously the core sector growth slips to 3.6 per cent, a 15-month low in January.
Latest data show eight core sectors grew slower than 4.9 per cent in December and 9.6 per cent in January 2023. The core sector consists of 41 per cent 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 per cent, a study by Systematix group denotes, the present contribution is on the rise at 34 per cent. 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 Uttar Pradesh and over a billion more for schemes in West Bengal, Chhattisgarh, Tamil Nadu, other states, schemes for railways and other areas. The rail projects are linked to construction of railway 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 per cent a year or 55 per cent in a decade. This was above the Asia-Pacific’s figure of 2.1 per cent.
The Indian Institute of Management, Ahmedabad, which 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 per cent in December 2023 from 4.73 per cent 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 tomato, 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 2-11 January 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 goods of their choice.
This is also reflected in foreign direct investment (FDI) as a percentage of GDP being restricted to 2-2.5 per cent 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. — INFA