Consumer price inflation remains high and core inflation continues to defy the distinct softening of input costs, officials write in an article on State of the Economy in March RBI Bulletin

Even as the global economy is set to slow down or even enter a recession in 2023 as financial markets worldwide face heightened uncertainty, the Indian economy is steadily gathering momentum, Reserve Bank of India (RBI) officials headed by deputy governor Michael D. Patra wrote in an article in the March RBI Bulletin.

India had emerged from the pandemic years stronger than initially thought, they asserted.

“Unlike the global economy, India would not slow down – it would maintain the pace of expansion achieved in 2022-23,” the officials wrote, adding: “We remain optimistic about India, whatever the odds”.

The officials observed that the National Statistical Office’s (NSO) end-February data release indicated that the Indian economy was intrinsically better positioned than many parts of the world to head into a challenging year ahead, mainly because of its demonstrated resilience and its reliance on domestic drivers.

On the supply side, agriculture was into a seasonal uptick, they wrote, with industry also emerging out of a contraction and services having maintained momentum.

However, they did flag price stability as a concern including the persistent stickiness in core inflation.

“Consumer price inflation remains high and core inflation continues to defy the distinct softening of input costs,” they noted.

Noting that the bank collapses in the U.S. in the first half of March were rippling through the global financial markets, with the likely direct impact of the meltdown on economic activity appearing to be limited at present, they said markets were, however, bracing for tighter financial conditions “which could present a trade-off between financial stability concerns and the conduct of disinflationary monetary policy”.

“Fear is creeping back; after remaining tepid for months, the VIX – Wall Street’s fear gauge – surged by 17.7% by March 17 over its level at the end of December 2022. Yield curves are in deep inversion and the future looks darker than it did just a few weeks ago in early February,” they wrote.

Stating that the currently available forecasts of India’s real GDP growth for 2023-24, including those of the RBI, settled between 6.0 and 6.5%, they stated: “But, as we wrote in last month’s edition of the State of the Economy, what if at least 50% of the ₹35,000 crore of tax relief proposed in the Union Budget is used by taxpayers for consumption and adds to private final consumption expenditure – a component of GDP?”

“This is plausible because the proportion of an additional rupee of income that is spent on consumption by households in India is estimated at ₹0.54 (54 paise). And what if even a third of the additional allocation of ₹3.2 lakh crore budgeted for effective capital expenditure adds to gross fixed capital formation, another component of GDP?”

India’s real GDP could go up from ₹159.7 lakh crore in 2022-23 to not just ₹169.7 lakh crore in 2023-24, as was currently being projected, but to ₹170.9 lakh crore, they surmised.