The retreat of inflation is expected to be stubborn and beset by supply shocks over the year ahead, cautioned an article in RBI’s latest monthly bulletin.
Almost every other component of the consumer price index – statistical and exclusion-based measures – is showing a hardening of price pressures, per the article “State of the Economy.’
The article, put together by RBI staff, noted that ‘Households’ inflation expectations have flat-lined and manufacturing corporations are facing moderation in growth of sales and revenues.
‘With pressures building on profits, capital expenditure remains restrained. Hence, the stance of monetary policy will need to remain disinflationary for consumer spending and business investment to pick up on a durable basis and provide a solid foundation for an acceleration of growth,’ per the article.
As per the provisional data released by the National Statistical Office (NSO), inflation – as measured by y-o-y changes in the all-India consumer price index (CPI) – increased sharply to 6.5 per cent in January 2023 from 5.7 per cent in December 2022
The authors observed that the impact of monetary policy actions is being reflected in the channels of transmission, but the road ahead is daunting.
Union Budget
The authors believe that India will decouple from macroeconomic projections of current vintage and also from the rest of the world.
In their view, the instrument of decoupling will be the Union Budget by (a) raising India’s growth prospects over the period 2023-27; and (b) raising India’s potential growth.
Besides the promises kept on consolidation and capital expenditure, the tax changes proposed in the Budget will put at least ₹35,000 crore in the hands of households. The implications of these three aspects on the outlook for growth are profound, the article said.
The authors assessed that the Union Budget’s tax, capex and fiscal consolidation proposals can take India’s real GDP growth close to 7 per cent in 2023-24 if they are effectively implemented.