India poised for stronger growth over next decade amid AI, climate risks: RBI

Mumbai: India’s economic outlook remains buoyant owing to the government's increased spending on infrastructure without deviating from its fiscal consolidation goals, among other key factors, the Reserve Bank of India said in its annual report for 2023-24.

While the domestic economy remains robust in the face of adverse global macroeconomic conditions, “lingering geopolitical tensions, geoeconomic fragmentation and adverse climate shocks” pose downside risks to the growth outlook, the central bank said in the report released on Thursday.

“…the Indian economy is navigating the drag from an adverse global macroeconomic and financial environment,” it said.

Although India's economy is poised for stronger growth over the next decade, it would need to navigate some of the challenges arising out of the rapid adoption of artificial intelligence and machine learning technologies, and recurrent climate shocks, RBI added.

According to the central bank, apart from increased government capital expenditure and strong corporate balance sheets, rising capacity utilisation, double-digit credit growth, a healthy financial sector, and the ongoing disinflation are also powering the economy’s growth.

“Manufacturing and services sectors were the key drivers on the supply side, while agricultural activity slowed down due to uneven and deficient monsoon rainfall,” RBI said.

As per aMintpoll of economists, India’s economy likely ended FY24 on a strong footing, despite the fourth quarter being weighed by a slowdown in industrial growth and subdued agricultural activities. GDP data for January-March and FY24 are scheduled to be released on 31 May.

Also read |GDP grew 7.9% in FY24 despite slower January-March

Strong real GDP growth

Even against the backdrop of subdued global economic activity and other headwinds, the Indian economy expanded at a robust pace in FY24, with real GDP growth accelerating to 7.6% (as per the second advance estimate), from 7% in the previous year–the third successive year of 7% or above growth, RBI said.

“The domestic economy exhibited robust growth in 2023-24, underpinned by strong investment activity, amidst subdued external demand.”

In its April monetary policy, the central bank pegged FY25 growth at 7%, an estimate it reiterated in the annual report. Going by the second advance estimate of FY24 GDP growth at 7.6%, the average growth over the last three years adds up to 8%. Growth in FY25, estimated by RBI at 7%, would thus be affected by some base effect.

Easing inflation

RBI in its annual report said inflationary pressures had moderated, although unevenly, during 2023-24. It attributed the softening to “sustained anti-inflationary monetary policy stance, proactive supply management measures by the government and correction in global commodity prices”.

Headline inflation eased to 5.4% during 2023-24 from 6.7% in 2022-23, driven by a fall in core inflation—consumer price index, or CPI, excluding food and fuel, declined to 4.3% from 6.1% in that period.

“As headline inflation eases towards the target, it will spur consumption demand especially in rural areas,” RBI said.

Retail inflation came in at 4.83% in April, staying within RBI’s flexible inflation target of 2-6% for the eight consecutive month. RBI reiterated that its inflation target is 4% and that the central bank would look for durable signs of deceleration in inflation.

A profit surge and a record dividend

RBI’s net income surged 141% year-on-year in the financial year ended March on the back of a sharp drop in expenditure, particularly lower provisions, its annual report showed.

Net interest income rose to ₹2.1 trillion at the end of March from ₹87,420 crore a year earlier, which allowed RBI last week to announce arecord dividend payout of ₹2.1 trillion to the government for FY24. That’s higher than the government budget estimate and analysts’ expectation of ₹1 trillion.

The size of RBI’s balance sheet increased 11.08% to ₹70.48 trillion.

Also read |What does the RBI’s record dividend payout to the government mean?

The annual report showed that the sharpest increase in income during FY24 was from foreign sources, which surged 71% to ₹1.03 trillion. Domestic income was relatively unchanged at ₹85,428 crore.

Total expenditure fell by 56.3% to ₹64,694.33 crore during FY24 on account of lower provisions.

On the expenses side, the major factor that decides the quantum of transferable surplus is the provision towards the contingency fund. RBI transferred ₹42,820 crore towards the fund, raising the buffer to 6.5%, from 6% last year.

This provision was, however, lower by 67% than what was done last year. Revaluation gains on RBI’s rupee and foreign currency assets during FY24, owing to softening of yields, helped the central bank set aside lower contingency provisions, and transfer the surplus income as dividend to the government.

Also read |RBI’s huge surplus transfer: Largesse in need of an explanation

“We expect that higher dividend payments could continue in FY25 also,” SBI Research said in a report on 30 May. “This is because US yields continuing at above 4% will imply asset income boost for RBI as well as bolstering foreign exchange reserves through $ buying.”

Therefore, there is a large probability of RBI’s dividend being healthy in FY25 as well, and it may even be closer to ₹2.1 trillion, SBI Research added.