The Reserve Bank of India (RBI) Governor Shaktikanta Das, in the central bank's monthly bulletin for February 2024, says the Indian economy is making "confident progress" on a strong, sustained and transformative growth path, and that it's committed to bring down inflation to the target of 4% in a timely and sustainable manner.

"The inflation trajectory, going forward, would be shaped by the outlook on food inflation, about which there is considerable uncertainty," he says, adding that adverse weather events remain the primary risk with implications for the rabi crop.

Notably, India's headline inflation moderated to an average of 5.5% during April-December 2023 from 6.7% during 2022-23. Food price inflation, however, continued to impart considerable volatility to the inflation trajectory. The retail inflation softened further to a three-month low of 5.10% in January 2024.

Have the recent shocks changed the core inflation properties? The RBI economists say since early 2020, multiple supply-side shocks, particularly in food and energy, have led to some degree of persistence in headline inflation. “This led to spillovers from non-core to core inflation weakening some properties of core inflation, although in the long-run, non-core inflation still converges to core inflation.”

The RBI economists write that expectations of a fresh round of capex by the corporate sector will likely fuel the next leg of growth. The Interim Budget for 2024-25 placed the gross fiscal deficit of the government at 5.1% of GDP in 2024-25, in line with the target of 4.5% of GDP by 2025-26.

"The impetus provided to capital expenditure in the post-pandemic period has been sustained by increasing its share to­ 3.4 per cent of GDP," the RBI economists write in this month’s bulletin.

They say empirical findings show that medium-term complementarities between judicious fiscal consolidation and growth outweigh the short-run costs. Spending on social and physical infrastructure, climate mitigation, digitalisation and skilling the labour force can yield long-lasting growth dividends, say the RBI economists.

“If government expenditure is directed towards the above-mentioned segments, the debt-GDP ratio of the general government can decline substantially to 73.4% of GDP by 2030-31, around 5 percentage points lower than the IMF’s projected trajectory of 78.2%,” they write.

This is noteworthy as the debt-GDP ratio is projected to rise from 112.1% in 2023 to 116.3% in 2028 for advanced economies and from 68.3% to 78.1% for emerging and middle-income countries.

“It is in this context that we reject the IMF’s contention that if historical shocks materialise, India’s general government debt would exceed 100 per cent of GDP in the medium-term and hence further fiscal tightening is needed,” economists opine.

On evolving business sentiments of Indian services and infrastructure enterprises, the RBI economists say one of its forward-looking surveys, the Services and Infrastructure Outlook Survey (SIOS), reflects the sentiments of the domestic services and infrastructure sectors. "SIOS has demonstrated its efficacy as a tool for forward-looking assessment by establishing a robust connection between survey parameters and macroeconomic variables."

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