Balancing Growth and Inflation in India's Economy

The Indian economy is at that very critical juncture in 2024, with growth aspirations amidst persistent inflationary pressures in an uncertain global and domestic environment. The recent move of the MPC to retain the repo rate at 6.5%, along with the SDF rate at 6.25% and the MSF rate at 6.75%, is calibrated. A notion has been created to steady the economy in such a manner that inflation is tamed without hurting growth in crucial sectors like agriculture, industry, and services.

GDP growth of 5.4% in Q2 FY2024-25 was a downside surprise; however, strong growth projections of 6.6% in FY2024-25 are supported by robust performances across services, particularly trade, transport, and communication, on strong consumer demand during the festive season. On the other hand, manufacturing remained in a tight position, with industrial production cooling down significantly to 2.1% in Q2 from 7.4% in Q1, mainly because of the weaker performance of the key sectors such as petroleum, steel, and cement. This, however, may be helped by the government-sponsored initiatives such as the PLI schemes in the high-value sector, like electronics, textiles, and automotive.

Inflation does remain a concern. Accordingly, on one hand, the surge of overall CPI inflation to 6.2 per cent in October and especially, food inflation at 9.7 per cent strongly revived the upward pressures from basically vegetable-related, cereals, and edible oil prices, thereby affecting directly household consumption, particularly at the rural level, wherein food constitutes a sizeable chunk of household budgets. While the kharif harvest could ease food inflation pressures, the risks are high at this juncture considering the rising global commodity price pressures, weather disruptions, and energy price volatility. In response, given the situation, the RBI increased the limit for collateral-free agricultural loans to ₹2 lakh per farmer-a move that would extend some succor. Though it is all that, long-term structural challenges dealing with addressing storage infrastructure, reducing wastages, and ensuring crop diversification should be carried out in protecting the country against commodity price volatility.

Agriculture has always been both an invariable challenge and a beguiling opportunity for the containment of food inflation. With Kharif yields strong and the prospect bright for rabi, this is expected to be the year that will bring record production, with consequent succor from food price pressures, something India needs rather urgently. This is made possible with continued investments in modern farming techniques, improved storage facilities, and increased access to enhanced market linkages. Diversification of crops will further cushion the sector from volatile prices caused by weather conditions that disrupt global supply chains.

Trade continues to be among the key growth drivers. Merchandise exports of India went up by 17.2% in October '24 and reflected competitiveness for the countries in the related sectors including chemicals, engineering goods, and textiles. Among services, IT and business services remained relatively resilient, exporting 22.3% this October month. However, India, too, remains vulnerable to a recessionary effect of the global economy, due to much dependence on the USA and Europe for its services' exports-and exports that are almost subdued given slackening demands in both these critical markets. Sustained growth will require India to work at diversifying its export markets and increase its footprint globally, particularly in less traditional sectors.

Another big variable still key to India's economic fortunes has remained geopolitics at the global level. Growing tensions between Washington and Beijing with regard to trade, conflict in Russia and Ukraine, and other geopolitical risks all continue to raise uncertainty and volatility around the world. These events not only affect global trade but also create risks in energy supply, commodity prices, and capital flows. The depreciation of the Indian rupee by 1.3% against the US dollar in 2024 underlines some of the external pressures on the economy.

But dearer access to credit, along with deteriorating financial conditions in the advanced economies, raises all these risks by increasing the cost of borrowing and putting additional pressure on capital flows to emerging markets like India. BFSI, too, is very important in the mitigation of these risks. Credit and deposit growth stood at 12.4% and 11.6%, respectively, as of November 2024.

In short, such growth has continued to support economic activity through much-needed financing of important sectors: agriculture, manufacturing, and infrastructures. On the other side of the balance, high inflation keeps influencing the consumers' sentiment in general, while raising interest rates weigh on consumption and investment across businesses.

This, in effect, means that the recent reduction of the CRR by 50 basis points that the RBI effected should release ₹1.16 lakh crore into the banking system, improve liquidity, and ensure credit flow to MSMEs and rural businesses, which is the key ingredient in India's economic recovery.

Manufacturing is still growing at a slower rate, though it should recover in light of rising government expenditure on infrastructure. Though the readings of Manufacturing PMI remained positive and indicated the optimism in recovery of the sector, these would be strong beneficiaries under electronics and automotive and are central to the PLI schemes that are critical to pushing long-term growth in manufacturing. On the contrary, headwinds from increasing input prices and disrupted supply chains across the world keep prospects for overall industry-and particularly energy-intensive segments-very challenging. The near-term outlook for companies across all industries is mixed.

Strong supportive government policies-the CRR reduction, higher infrastructure spending, and targeted financial inclusion-are pitted against still-high inflation, disrupted supply chains, and external geopolitical risks. Companies, especially in manufacturing and BFSI, will have to address these challenges by moving to more efficient practices, investing in technology, and diversifying supply chains to reduce the risks of global shocks.

As for the precautionary measures, businesses should be concerned with increasing operational resilience through the adoption of digital tools and automation in order to cut costs and boost efficiency. In the same vein, sectors such as agriculture and manufacturing have to embrace sustainable methods during this ongoing price fluctuation. This means, for policymakers, further investment in infrastructure, ease of doing business, and addressing labor market inefficiencies for sustained economic growth. The outlook for India's economy continues to be cautiously optimistic on a go-forward basis, with fiscal stimulus coupled with supportive monetary policies and structural reforms that should help overcome the challenges to capitalizing on its strength: a services-driven economy, growing middle-class income, and strategic positioning in the world system.

As India looks toward Viksit Bharat by 2047, the country cannot afford to be complacent with external risks, geopolitical instability, and increased global interest rates to upset its growth prospects. A more strategic diversification approach taken in trade, manufacturing, and financial services in a number of countries will finally be leading India on her trajectory toward competitiveness and resilience in the world economy.

Anamika Singh

#ViksitBharat #EconomicGrowth #India2024 #MonetaryPolicy #RBI