Five factors that could hamper RBI's optimistic GDP forecast for current fiscal and beyond

The upward revision in real GDP estimates by the Reserve Bank of India (RBI) from 6.5 per cent to 7.0 percent has brightened the prospect of higher growth in the economy. Though the revised GDP projection for 2023-24 is slightly lower than 7.2 percent in 2022-23, but it shows a huge upward momentum, which is a very positive sign. The Indian economy rebounded strongly from the Covid contraction of 5.8 percent in 2020-21 to a growth of 9.1 percent in 2021-22 and 7.2 percent in 2022-23.

At the start of the year, the RBI's real GDP projection  was at 6.5 per cent in both 2023-24 and 2024-25. In September, the Chief Economic Advisor, V Anantha Nageswaran, has said that the Indian economy is poised to grow at an average of 6.5 percent annually between 2023 and 2030. Will the Indian economy maintain this higher momentum of 7 per cent plus in the coming years? There are actually quite a few risks that could impede the current momentum.

Elevated inflation and higher interest rates

The monetary transmission, with a 250 basis points hike in the repo rate, is still working its way through the system. This is what RBI Governor Shaktikanta Das has maintained in the recent past. Households are already feeling the pinch of inflationary pressure and higher interest rates. Inflation is still not within the RBI's comfort zone of 4 percent, which is the target for the Monetary Policy Committee (MPC) for a sustainable long-term growth in the economy. RBI has projected CPI inflation at 5.4 percent for 2023-24, with Q3 at 5.6 percent and Q4 at 5.2 percent. Assuming a normal monsoon next year, CPI is projected at 5.2 percent for Q1:2024-25, Q2 at 4.0 percent, and Q3 at 4.7 percent. The Governor said that the unpredictability of domestic food inflation and volatility in crude oil prices and financial markets in an uncertain international environment pose risks to the inflation outlook.

Higher risk weights

The RBI's other significant concern is the overheating in certain retail segments. Last month, the RBI increased the risk weights in unsecured loans and banks' funding to NBFCs. This move has increased the capital allocation requirement for banks and NBFCs in the unsecured segment. There are also reports of higher delinquencies in the small loan segments. Many players are already curtailing their future growth in these retail segments. In fact, MSMEs, business loans, and other segments are also experiencing higher growth than usual, which could attract RBI's attention in future.

Government capex to shrink

The fiscal deficit post the pandemic shot up to 9.3 percent of GDP in 2020-21, opening fiscal space to spend higher in subsequent years. The fiscal deficit was 6.7 percent for 2021-22 and 6.4 percent in 2022-23. As a result, government capex reached a staggering Rs 10 lakh crore. But this fiscal space is gradually shrinking as the government is on a fiscal consolidation path with a targeted fiscal deficit of 5.9 percent in 2023-24. The glide path for deficit set by the government is 4.5 percent by 2025-26. This will substantially reduce government capex in terms of the percentage share of GDP going to government capex in the coming years.

Private capex yet to pick up

Banks and corporates are sitting on one of the best years in terms of asset quality, capital, cash in the balance sheet, and deleveraging. However, private capex is not picking up as anticipated. Large corporate houses are   investing, but it is not widespread, given that capacity utilization is still around 70 percent. As government capex is expected to slow down, a revival of private capex will help in the growth momentum, but it is not happening. The slowdown in the global economy is also a factor, as corporate entities adopt a wait-and-watch approach.

Navigating geopolitical challenges

Finally, geopolitical tension is creating an environment of uncertainty for the financial system. The Russia-Ukraine conflict and the Israel-Hamas war have impacted supply chains and prices. Some impact is already visible in terms of currency depreciation and the strengthening of the dollar. The Governor mentioned that emerging market economies (EMEs) continue to face volatile capital flows.

 

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