Stalled demand, sluggish growth
RBI holds interest rates steady, revises growth forecast down to 6.6% for 2024-25, citing demand-side issues, while inflation remains a key focus.
Markets got the September quarter GDP number wrong when it came in at 5.4% instead of the widely expected 6.5%. But they were mostly right about the outcome of the Monetary Policy Committee (MPC) meeting which ended on Friday. RBI has kept interest rates unchanged as expected and also accepted that it was unwarrantedly bullish about growth. The annual growth forecast for 2024-25 has now been brought down to 6.6% instead of 7.2% in the October resolution of MPC. What is noteworthy is that Friday’s downward revision to growth is not just on account of a subpar performance in the September quarter. Growth forecasts for quarters ending December 2024 and March 2025 now stand at 6.8% and 7.2%, respectively, instead of the 7.4% for both these quarters in the October resolution.
To be sure, RBI’s latest growth projection is still in the ballpark of 6.5-7%, which is what the 2023-24 Economic Survey projected in July this year. The current team in the finance ministry has been known to be conservative in its growth projections; they are a critical premise behind budgetary calculations. This means RBI’s downgrading of growth projections should not have any adverse fiscal implications. This is good news.
To be sure, not everything is hunky-dory on the macroeconomic front. While there are the usual upsides such as prospect of revival in rural demand thanks to a good cropping season, there are enough indications that the roots of the current slowdown are to be found in a demand-side problem — a legacy of the post-pandemic recovery. It is not without reason that the chief economic advisor, while speaking in an Assocham event on Thursday, had to reprimand corporates about using recently earned profits to deleverage rather than passing the gains to employees in better salaries, which would have supported aggregate demand. It is a weakness in the latter which has kept a sustained recovery in private investment cycle an elusive goal.
Can economic policy do anything else to break this vicious cycle apart from urging private capital to change the class distribution of the value it creates?
Fiscal policy would like monetary policy to take on the baton now. The former has already entered consolidation mode and it must continue to do so to align deficit and debt levels to stated goals. Given the fact that 2025 is a low-risk year with only two state elections (Delhi and Bihar), even the political incentives for a fiscal splurge would be pretty low. Monetary policy, at the moment, seems to be more committed to making sure that inflation aligns with the 4% target on a durable basis. RBI has made it more than clear that irrespective of whether inflation is inching up because of just potatoes and onions or a general overheating in the larger economy, it will focus only on the headline. Right now, it is the former which is driving inflation.
To be fair to RBI, it is only doing what it has been asked to do under India’s inflation targeting framework which treats benchmark inflation as the target. It is up to the government, not RBI, to tweak this mandate. While the central bank could begin reducing rates if prices soften by February, nothing is a given. There are already reports of potato crop yields being adversely affected because of the unusually warm early winter.
Is there a larger takeaway? There is no crisis in the Indian economy at the moment. Both fiscal and monetary policy can afford to be hawkish in their cyclical outlook. But there must be a rethink on reinventing the structural drivers of growth for the Indian economy.