Growth engines to keep firing in June quarter, says RBI bulletin

Mumbai: The Indian economy is likely to sustain the growth momentum of the January-March quarter in the three months through June as private consumption grows and manufacturing and services pick up pace, Reserve Bank of India (RBI) officials said.

The domestic economy expanded at a better-than-expected rate of 7.8% in Q4 of 2023-24, while growth for the full year was at 8.2%. If the optimism of the central bank officials borne out in RBI's June bulletin bears fruit, growth prospects for the June quarter may be brighter than the 7.3% projected by its monetary policy committee on 7 June.

While the article—State of the Economy—was written by RBI officials including deputy governor and MPC member Michael Patra, it had the usual disclaimer that the views were those of the authors and not of the central bank.

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In the years since the covid-19 pandemic, India’s growth trajectory is seen to be shifting upwards from the 2003-19 average of 7% to the 2021-24 average of 8% or even more, powered by domestic drivers, the article said.

“More recent indicators suggest that private consumption is resuming its role as the main driver of demand and is getting broad-based to include rural consumers,” it said, adding that the fast-moving consumer goods (FMCG) sector is gearing up for a strong turnaround on expectations of a pick-up in public welfare spending.

Decline in walk-in shoppers

Among other indicators, the article said that a decline in walk-in shoppers is being compensated for by e-commerce platforms, especially in heatwave conditions. Investment, it said, has maintained steady growth, although some moderation in the immediate past could be on account of transitory uncertainty weighing on investment decisions, but it shall pass. 

“A strong revival in private investment has to become the most important factor driving growth in the years to come, especially as public finances consolidate,” it reiterated. 

In its February bulletin, the article on the state of the economy had called upon India Inc. to lead the way in capital expenditure (capex), a space being dominated by large government spending in recent times. The corporate sector, the article had said, must “get its act together”, ready to relieve the government of capex heavy lifting. 

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The article pointed to the MPC assessment and said that high frequency indicators of activity reflect a sustained momentum in manufacturing and services. 

“The prospects for agriculture are brightening with the expectations of an above-normal SWM (South West monsoon) and the actual landfall ahead of its schedule. This should augur well for spurring rural demand and, in turn, support private consumption,” the article said.

Taken with a pinch of salt

Economists chose to take the optimism of the authors with a pinch of salt. According to Dhiraj Nim, economist and forex strategist at ANZ Research, when RBI says momentum is sustained, they perhaps are pointing to the sequential momentum in activity. 

“That does not mean that the annual or year-on-year growth rate would not slow down. There is the high base from FY24,” said Nim. “I think that investment will likely sustain in the near term; public capex looks healthy and there are some green shoots of private industrial capex picking up as well.”

He added that like the RBI said, there are some green shoots in rural demand and that will sustain through the June quarter and aid consumption spending. However, Nim does not believe that consumption will become a significant growth driver because urban consumption is not growing at a frenetic speed as it was several quarters ago. 

Others said the divergence between gross value added (GVA) and gross domestic product (GDP) should be taken into account as well. GVA is GDP stripped of net tax collections. 

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“The FY24 GDP was significantly high as compared to GVA owing to greater tax collection. While GDP growth of 7.3% (MPC estimate) is very encouraging, the rising divergence between GVA and GDP needs closer focus because the GVA trends are suggesting some amount of cooling in agriculture and services, while industry has been doing well,” said Debopam Chaudhuri, chief economist, Piramal Enterprises.

According to Chaudhuri, that trend would be there in the first quarter as well and the country might see high GDP growth, but the GVA would once again be significantly lower.