India’s growth momentum is likely to be sustained in 2023-24 in an atmosphere of easing inflationary pressures, but domestic economic activity does face challenges from an uninspiring global outlook going forward, according to Reserve Bank of India’s annual report for FY23.

Slowing global growth, protracted geopolitical tensions and a possible upsurge in financial market volatility following new stress events in the global financial system could pose downside risks to growth, cautioned the report.

“It is important, therefore, to sustain structural reforms to improve India’s medium-term growth potential,” the report said.

RBI said domestic economic activity does face challenges from an uninspiring global outlook going forward, but resilient domestic macroeconomic and financial conditions, expected dividends from past reforms and new growth opportunities from global geo-economic shifts place India at an advantageous position.

GDP growth for 2023-24 put at 6.5 per cent

Taking into account softer global commodity and food prices, good rabi crop prospects, sustained buoyancy in contact-intensive services, the government’s continued thrust on capex, higher capacity utilisation in manufacturing, double digit credit growth, receding drag on purchasing power from high inflation and rising optimism among businesses and consumers, real GDP growth for 2023-24 is projected at 6.5 per cent, with risks evenly balanced.

The central bank noted that risks to inflation have moderated with downward corrections in global commodity and food prices and easing of the pass-through from high input cost pressures of last year.

The cumulative increase in the policy repo rate by 250 basis points last year would steer the disinflationary process, along with supply-side measures to address transient demand-supply mismatch due to food and energy shocks, it added.

“With a stable exchange rate and a normal monsoon — unless an El Nino event strikes — the inflation trajectory is expected to move down over 2023-24, with headline inflation edging down to 5.2 per cent from the average level of 6.7 per cent recorded last year.”

“Monetary policy remains focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth,” the report said.

RBI said the realignment of global supply chains, transition to green energy and ongoing technological advancements provide a congenial environment for a pick-up in investment activity and raising productivity

The robust balance sheets of corporates and banks, coupled with high capacity utilisation, would aid in strengthening the momentum in private investment.

FPI flows may remain volatile

In the external sector, the current account deficit (CAD) is expected to remain moderate, drawing strength from robust services exports and the salubrious impact of moderation in commodity prices of imports.

“With global uncertainties persisting, foreign portfolio investment (FPI) flows may remain volatile. The favourable domestic growth outlook, lower inflation, and business-friendly policy reforms could, however, help sustain buoyant FDI inflows,” per the central bank’s assessment.

Further, inward remittances are likely to remain robust owing to better growth prospects in the Gulf countries. As a result, external vulnerability risks may ease further during 2023-24.

Referring to the turbulent global economic environment, RBI said India has experienced macroeconomic and financial stability with a steady pick-up in the momentum of growth.

“This reflects a sound macroeconomic policy environment and the innate resilience of the economy, which fortified it against recurring global shocks.

“India has remained among the fastest growing major economies of the world, contributing more than 12 per cent to global growth on average during the last five years,” RBI said.

The central bank observed that as inflation eases from its high reaches under the combined impact of monetary policy actions and supply management, fiscal consolidation reduces debt and deficit levels from pandemic-induced highs, the current account deficit remains within sustainable levels; macroeconomic stability is getting entrenched.

“Strong and healthy balance sheets of banks, financial institutions and corporate entities is helping to regain growth momentum eroded by the pandemic and the war.

“Medium-term prospects have been brightened by the demographic dividend, the digital revolution, policy initiatives to transform India into a global manufacturing hub, a resurgence in services sector competitiveness and favourable geo-economic positioning,” RBI said.

Key highlights
  • Atmosphere now of easing inflation pressure.
  • Risks to inflation have moderated with downward corrections in global commodity and food prices.
  • With global uncertainties persisting, Foreign Portfolio Investment flows may remain volatile.
  • Strong, healthy balance-sheets of banks, financial institutions and corporates helping to regain growth momentum in private investments.