India growth gets a leg-up from IMF, World Bank & ADB
India’s economic growth forecasts have seen a series of upgrades by several international multilateral institutions. These forecasts have bolstered the numbers that the National Statistical Office (NSO) of the Union government and the Reserve Bank of India (RBI) have put out. NSO has projected that India’s real gross domestic product (GDP) will grow by 7.6 per cent in 2023-24, which many experts believe is an underestimation as the real growth rate for the full year could be closer to 8 per cent. However, even the RBI believes that India’s real GDP growth in 2023-24 should be 7.6 per cent. But the growth rate for 2024-25 and 2025-26, according to the RBI, will be lower but healthy at 6.7 per cent and 6.5 per cent, respectively. It is in this background that the World Bank’s projections for 2023-24 and 2024-25 assume significance. For last year, the World Bank has placed India’s growth at 7.5 per cent, lower than NSO’s estimate, but for 2024-25 its estimate has been revised upwards to 6.6 per cent. And growth in subsequent years will pick up as a decade of robust public investments is expected to yield growth dividends. Noting that growth in services and industry will remain robust in India, the World Bank has said it expects inflationary pressure to subside, creating more policy space for easing financial conditions. The medium-term outlook has suggested that the government’s fiscal deficit and debt should decline, supported by strong output growth and consolidation efforts by the Central government. There are a few worry points, though, as evident in the reliance of India’s growth pick-up in the near term on the public sector, even as private sector investments continue to remain weak. The Asian Development Bank (ADB) is more optimistic as it has upgraded India’s GDP growth forecast for 2024-25 from 6.7 per cent to 7 per cent. This upgrade is based on better prospects of strong public and private investment and robust services sector growth. The risks to such growth prospects arise from unanticipated global shocks like supply-line disruptions to crude oil markets and weather shocks impacting agriculture output. Even the International Monetary Fund (IMF) has upgraded India’s growth forecasts for 2024-25 from 6.5 per cent to 6.8 per cent. The upgrade is attributed to buoyant domestic demand and strong public investment. For 2025-26, the IMF expects India to grow at a slightly slower rate of 6.5 per cent. But the more significant estimate from the IMF is for 2023-24 – its forecast for India’s GDP growth last year has been raised to 7.8 per cent.
Small finance banks get RBI okay to be universal banks
On April 26, the Reserve Bank of India (RBI) took one big step in facilitating the entry of new players in the universal banking arena. It came out with guidelines for voluntary conversion of small finance banks (SFBs) into universal banks. This was in tune with the 2019 decision that laid down a transition path for SFBs to become universal banks. The conditions to be fulfilled by private-sector SFBs before they could become universal banks include their meeting the minimum paid-up capital or net worth requirements. Only listed SFBs with a minimum net worth of Rs 1,000 crore will be eligible to become universal banks. Such SFBs must also have a scheduled status and a satisfactory track record of at least five years. A gross non-performing asset (NPA) of 3 per cent or less and a net NPA of 1 per cent or less in the previous two financial years are two major conditions. Another condition SFBs must fulfil before their transition is that they should have reported net profit in the past two financial years along with meeting the prescribed capital adequacy norms. More than half a dozen SFBs could become eligible to apply to the RBI to become a universal bank. AU SFB, with a net worth of about Rs 12,500 crore, a capital adequacy ratio of 20 per cent and a gross NPA of 1.66 per cent is perhaps the strongest candidate, followed by Equitas SFB, Ujjivan SFB, Utkarsh SFB, ESAF SFB, Jana SFB and Suryoday SFB. The first set of SFBs came into being in 2016, a year after the RBI granted licences to about 10 applicants. By the end of June 2023, there were about a dozen SFBs with over 6,500 domestic branches across the country. After the merger of AU SFB and Fincare, there are now only 11 SFBs. Significantly, just about a fortnight before the RBI allowed SFBs to become universal banks, M. Rajeshwar Rao, deputy governor of the RBI, had turned down the request from SFB to drop the “small finance” tag from their name, arguing that these were differentiated banks with specific objectives like financial inclusion. With the new guidelines, SFBs can now transition to universal banks and drop the tag of a small finance bank.
RBI optimistic on growth, but cautious on inflation
The first monetary policy review of the current financial year saw no surprise decisions from the Monetary Policy Committee of the Reserve Bank of India (RBI). After a three-day meeting, the Committee, led by RBI Governor Shaktikanta Das, concluded on April 5 that the repo rate (at which the central bank lends money to banks) should remain unchanged at 6.5 per cent. From May 2022 to February 2023, the RBI had raised the repo rate by varying margins from 4 per cent to 6.5 per cent. Since February 2023, the repo rate has stayed unchanged and in April 2024 even the monetary policy stance remained unchanged for the seventh consecutive time. The decision has been prompted by the RBI’s commitment to ensure last-mile disinflation to reach the inflation target of 4 per cent. The RBI Governor said: “Robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4 per cent.” Obviously, the Monetary Policy Committee members are concerned over the uncertainties in food prices that could pose challenges for managing inflation. They are obviously aware of the need to remain vigilant to the upside risks to inflation. This is understandable as the median projections of retail inflation by professional forecasters have placed it at 5.1 per cent in 2023-24, with the expectation of it going down to 4.6 per cent in 2024-25. In the same period, RBI’s projections for growth in gross domestic product (GDP) are 7.6 per cent and 6.7 per cent, respectively. Showing his unwavering commitment to contain inflation, Das recalled that in April 2022, when retail inflation had risen to 7.8 per cent, “the elephant in the room” was inflation. And now, he said, “the elephant has gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis.” In other words, the RBI has shown some optimism on growth but remained cautious about inflation.
High-frequency indicators maintain buoyancy
India’s high-frequency economic indicators in April suggested continued buoyancy in the economy. Gross collections of goods and services tax (GST) in March 2024 grew 11.5 per cent to post the second-highest figure of Rs 1.78 lakh crore, even as collections of integrated GST or IGST on imports had slowed down. This implied that gross GST collections during the whole of 2023-24 rose 11.7 per cent to Rs 20.18 lakh crore. However, net GST collections, after accounting for refunds, rose to Rs 18.01 lakh crore, although the increase was slightly higher at 13.4 per cent. But gross GST collections, measured as per cent of gross domestic product (GDP), were still only marginally higher than what prevailed during the pre-Covid period. Gross GST collections were 6.05 per cent of GDP in 2019-20 and by 2023-24 they rose only to 6.87 per cent. On the other hand, sales of passenger vehicles during 2023-24 at 4.23 million units rose 8.74 per cent, driven largely by strong demand for sports utility vehicles and healthy demand from rural India. Transactions through Unified Payments Interface or UPI also recorded a rise of 57 per cent to 131 billion in 2023-24, while in value terms the increase was 44 per cent to Rs 19.9 lakh crore. Coal production, a key input for power generation, rose 10 per cent to 774 million tonnes in 2023-24, with all the seven units of Coal India Limited exceeding their production targets. Indian Railways, which had reported slow growth in its freight traffic in the initial months of last year, saw a small increase of 5 per cent in its overall freight movement to end 2023-24 with a total haulage of 1.59 billion tonnes of goods. The outlook for the manufacturing sector got better with the Purchasing Managers Index rising to a 16-year high of 59.1 in March 2024, up from 56.9 in the previous month. An index of over 50 represents expansion in the manufacturing sector, while a reading under 50 indicates contraction.
Good tidings from monsoon forecast
The Indian Meteorological Department or IMD has released its annual rainfall forecast for 2024, bringing relief for managers of the economy. IMD’s forecast indicates that there would be an “above-normal” monsoon in 2024, which could be around 106 per cent of the long-period average or LPA. Good monsoon rain not only helps keep prices under check and assists the government in managing inflation, but it also helps boost the rural economy. Even though many states now enjoy the benefits of irrigation, farmers are generally dependent on rains. With good monsoon, they are economically better off, boosting their consumption demand and the performance of those companies which produce goods and services largely consumed in the rural markets. That the IMD’s forecast was broadly in tune with other such projections made by private-sector agencies has improved the Indian economy’s outlook. The significance of IMD’s forecast this year also lies in the fact that this is the first time since 2016 that it has predicted “above-normal” rains. In 2023, the monsoon was “below normal”.
Inflation management challenges not yet over
In March 2024, the trajectory of retail inflation showed signs of converging with that of wholesale inflation, even though the gap between the two indices for price rise remained quite substantial. India’s retail inflation, based on the movement in the Consumer Price Index, moved down to a 10-month low of 4.85 per cent, down from 5.09 per cent recorded in February. The decline was driven by deflation in the fuel and light group, where prices fell by 3.24 per cent. However, food and beverages inflation remained elevated, even though it eased marginally to 7.7 per cent in March, compared to 7.8 per cent in February. Core retail inflation (excluding volatile food and fuel items) decelerated to 3.25 per cent in March 2024. But this was no comfort for the RBI’s Monetary Policy Committee, which was focused on bringing the overall retail inflation rate down to the government-mandated target of 4 per cent. India’s wholesale inflation rate, based on the movement in the Wholesale Price Index (WPI), was on a different trajectory, as it rose to a three-month high of 0.53 per cent in March 2024, compared to 0.2 per cent in the previous month. With that inflation print, wholesale prices have stayed away from a deflationary trend for the fifth consecutive month. For a major part of 2023-24, WPI was in deflation zone. The rise in wholesale inflation was caused by an increase in prices of food articles, electricity, crude petroleum and natural gas.
Exports of merchandise goods shrink, so does trade deficit
India’s exports of merchandise goods fell by 3 per cent to $437 billion in 2023-24. These exports had recovered in the last two years, with their growth at 45 per cent in 2021-22 and 7 per cent in 2022-23. The government, however, was confident that exports had moved into a “positive cycle of growth” and the outlook for 2024-25 was positive. With imports of goods growing at about 5 per cent to $677 billion in 2023-24, India’s trade deficit was estimated at $240 billion, down from a higher deficit of $265 billion in 2022-23.
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