Within a week, the interim Union budget and the monetary policy have put in place a framework for a Goldilocks phase of steady growth and moderate inflation for the Indian economy.
On Thursday, the monetary policy committee decided to maintain the status quo, keeping the policy repo rate at 6.5 per cent. The forecast for GDP growth in 2024-25 has been kept at 7 per cent, while for headline inflation it has been reduced in line with our expectations to 4.5 per cent. With inflation expected to fall meaningfully below 4 per cent after June, the first rate cut could be as early as August if not in June itself. The growth forecasts by the RBI, which seem conservative, and rightly so, have been trailing the official estimates for the last two years. However, they only validate the country’s robust growth trajectory.
Among the development and regulatory policy changes, the RBI has extended the requirement of the Key Fact Statement to cover all retail and MSME loans and advances. This is designed to provide customers with a clear understanding of the actual annualised interest rate and the overall financial commitment associated with the loan. This move can be seen as a significant step towards empowering customers with comprehensive information, enabling them to make informed decisions about their borrowing.
The technology for authentication of payments has also received fresh attention. With innovations in technology, there is a need to look at a comprehensive framework for alternative authentication mechanisms. Accordingly, a principle-based “Framework for authentication of digital payment transactions” will be explored for the orderly development of this space.
Alongside, enhancing the robustness of the Aadhaar Enabled Payment System (AePS) — now being used by more than 37 crore users and 47 entities — and the adoption of a principle-based framework for authentication of digital payment transactions will help in preventing digital frauds. The changes proposed in the Central Bank Digital Currency could help onboard people from fringe areas into the CBDC architecture thereby enabling its acceptability exponentially.
However, with credit demand outpacing deposit accretion, the onset of a Just in Time (JIT) mechanism that streamlines the release of government of India funds may anchor the floor of yield on advances, apart from strengthening short-term borrowings as market players are also resorting to non-deposit sources to satiate the rising demand for credit, even as the credit to deposit ratio is a short breath away from hitting 80.
This MPC meeting comes a few days after the interim Union budget firmly stepped away from crowd pleasing measures, and focused on the vision of a developed India in Amrit Kaal, by enabling every Indian to align with the ambitious, yet achievable goal through action-oriented collaborative works. It set the right tone by focusing on infrastructure development, innovation and connectivity leading towards a Viksit Bharat.
As per our estimates, in the interim budget, the overall allocation for capital expenditure is Rs 18.4 trillion (this takes into consideration the capex by central public sector enterprises and grants for the creation of capital). This is equivalent to 5.6 per cent of GDP and implies a growth of around 13 per cent. This sustained thrust on public sector investments will go a long way towards making India a $5 trillion economy by 2027-28.
The fiscal consolidation path continues to be influenced by the exceptional deviation taken during the pandemic. The primary deficit is expected to correct by 80 basis points to 1.5 per cent of the GDP in FY25. In FY21 the primary deficit was more than 5 per cent of the GDP. The revenue deficit has also moderated. Public debt as a percentage of the GDP has also reduced and is expected to decline by 90 basis points in FY25 from its level of 58.1 per cent in FY24. Thus the debt to GDP ratio is expected to move along a stable path. There is also the possibility that if growth and inflation move along expected lines, the fiscal deficit will be lower than the 5.1 per cent target. Further, the market capitalisation of CPSEs is now at around Rs 40 trillion, with the government’s stake at around Rs 27 trillion. Buoyant market conditions will create opportunities for disinvestment later.
We would also like to use this opportunity to address some concerns over the state of the rural economy. Take for instance the implications of significant improvements in physical (road/rail) infrastructure which ensure seamless last mile connectivity are changing rural demand and supply. A farmer can now travel long distances comfortably to buy (and sell) goods. These purchases /sales are more often captured under urban/metro area heads even though the goods are being primarily purchased by the rural populace. Thus, it is possible that in some cases the numbers reported for rural areas may not be an accurate reflection of rural demand. The integration of cities, urban centres and their satellite nodes with surrounding areas and until now far flung areas on the back of the infra boom needs to be factored in carefully. Alongside, a closer look at the data on median wages of rural labourers during FY14-FY23 (November) clearly shows a rising trend. Median wages are now closer to the average wages. This is in clear contrast to the FY05-FY14 period. Further, the audacious target of increasing the lakhpati didi numbers through the 8.3 million plus self-help groups in the recent budget also bodes well for the rural economy.
The writer is Group Chief Economic Advisor, State Bank of India. Views are personal
India is well on its way to becoming Viksit Bharat
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09.02.2024
Within a week, the interim Union budget and the monetary policy have put in place a framework for a Goldilocks phase of steady growth and moderate inflation for the Indian economy.
On Thursday, the monetary policy committee decided to maintain the status quo, keeping the policy repo rate at 6.5 per cent. The forecast for GDP growth in 2024-25 has been kept at 7 per cent, while for headline inflation it has been reduced in line with our expectations to 4.5 per cent. With inflation expected to fall meaningfully below 4 per cent after June, the first rate cut could be as early as August if not in June itself. The growth forecasts by the RBI, which seem conservative, and rightly so, have been trailing the official estimates for the last two years. However, they only validate the country’s robust growth trajectory.
Among the development and regulatory policy changes, the RBI has extended the requirement of the Key Fact Statement to cover all retail and MSME loans and advances. This is designed to provide customers with a clear understanding of the actual annualised interest rate and the overall financial commitment associated with the loan. This move can be seen as a significant step towards empowering customers with comprehensive information, enabling them to make informed decisions about their borrowing.
The technology for authentication of payments has also received........
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