Economic
Highlights
New
Delhi, 4 March 2024
Core, Farm slip; Prices Up
CONSTRUCTION A BURDEN?
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
(Copyright, India News & Feature Alliance)
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