Editorial. Macroeconomic metrics look good, but policy stability must for growth

There is some cause for cheer on the economic front, going by the assessments by the Reserve Bank of India (RBI) and the Finance Ministry. Crucial metrics that have hobbled the economy are showing improvement: an increase in domestic demand and investment; and a decline in inflation. A rise in domestic demand is expected to offset the impact of a global slowdown, brought about by rate hikes across the US and EU. A narrower trade deficit (exports falling, but imports likely to fall as well on account of moderate commodity prices) is likely to offset any decline in foreign investment flows (net FDI flows have fallen from $44 billion in 2020-21 to $28 billion in 2022-23). The outlook on the rupee looks stable in a scenario where monetary hawkishness the world over is likely to abate.

A growth rate of 6.5 per cent in FY24 looks good in a year when “recession” has become an overriding worldwide concern. The Finance Ministry’s latest Monthly Economic Review observes (citing CMIE’s CapEx database) that proposals to set up new investment projects by the private sector soared to ₹10.9-lakh crore in Q4 FY23, “the highest recorded since the inception of the database”. However, these investment proposals are concentrated in services (other than financial), which accounts for ₹7.46-lakh crore. A lumpy investment announcement in one sector, be it telecom or aviation, may not indicate a revival across the board. An assessment by Bank of Baroda says that investment announcements in machinery and metals fell in FY23 over FY22, while the gestation period of projects has increased due to rising cost of capital. While credit growth may have picked up in aggregate, to industry it “has been below the normal pace of accretion” in FY23. That said, there has been a sustained increase in investment proposals since June 2022.

The uptick in business and consumer confidence, amidst rising inflation till just recently as well as interest rates, is noteworthy. Capacity utilisation edged towards 75 per cent in Q4 FY23, with nine out of 12 sectors, according to a FICCI survey, recording a level of over 70 per cent. Another happy augury is the increase in demand for items of mass consumption, possibly marking a break from a post-Covid trend of ‘premiumisation’ in FMCG and auto sectors. The rise in two- and three-wheeler sales, as well as steel and cement demand points to this shift. Fertiliser and tractor sales have done well in FY23.

However, there are more intangible threats to such ‘confidence’. Transparency and predictability of policy are a must to sustain this momentum. Recent moves, such as the recall of ₹2,000 notes, sudden changes in income tax rules and customs levies, besides endemic concerns over contract enforcement owing to judicial delays, could scupper confidence. An investment rate of 30 per cent of GDP cannot push the economy on to a higher growth trajectory. There are structural issues that a focus on high frequency indicators alone cannot address.

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