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Editorial of the Day (9th Apr): Status of Indian Economy

Context: The Indian economy is projected to have 7% GDP growth in 2024-25.

Indian Economy: Current Status

Economic Growth and Optimism

  • GDP Growth: India’s GDP grew by 8.4% in Q3 of 2023-24, with manufacturing PMI at a 16-month high of 59.1 in March.
  • Credit Ratio: The credit ratio stands at 1.92 in H2 of 2023-24, above the 10-year average of 1.57, indicating strong corporate and banking sectors.

Investment and Consumption

  • GDP Growth Led by Investment: The first three quarters saw over 8% growth, potentially exceeding the full-year advance estimate of 7.6%.
  • Weak Consumption Growth: Consumption GDP grew by only 3% for the year, compared to a pre-pandemic rate of 7%.
  • Rural Demand: Signs of improvement in rural demand, with FMCG volume growth in rural areas at 6.2% in H2 of 2023.

Government and Private Investment

  • Government Focus on Capex: Continued emphasis on capital expenditure.
  • Private Sector Investment: Notable investment in various sectors and an increase in the order book of capital goods companies.

Services-led Exports and External Trade

  • Impact of Poor Monsoon: Adverse effects on agriculture, contrasted with strong performance in sectors like hotels and healthcare.
  • Healthy Services Exports: Despite weak merchandise exports, services exports have been robust.

Financial Inflows and Forex Reserves

  • FII Inflows: Strong Foreign Institutional Investor inflows of $41 billion in 2023-24, boosting forex reserves to around $643 billion.

Inflation and Monetary Policy

  • Moderating Inflation: CPI inflation is below the RBI’s target, with an expectation of a moderate 4.8% in 2024-25.
  • Policy Rate Cuts: Potential for RBI policy interest rate cuts in H2, aligning with potential US Fed rate cuts.

Credit Growth and Banking Sector Health

  • Retail Credit Growth: Rapid rise despite higher interest rates, with a specific focus on the growth of personal loans.
  • Banking Sector: Strong overall credit growth but weak deposit growth, posing liquidity risks, though asset quality remains healthy.

Overall Assessment and Looking Ahead

  • The Indian economy is in a good position with a projected 7% GDP growth in 2024-25.
  • Digitalization and increased formalisation might have pushed India’s potential growth higher.
  • The government should focus on:
    • Inclusive and sustainable growth.
    • Fiscal consolidation as seen in the interim budget.
    • Public debt reduction post-pandemic.
    • Emphasis on quality of growth while addressing lurking risks.
  • With a new government on the horizon, hope for a renewed focus on these areas.

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