Arvind Virmani, NITI Ayog member. File
| Photo Credit: Special arrangement

“The Indian economy will grow around 7% in the current fiscal year and is on track to maintain a similar growth rate for several years,” NITI Aayog member Arvind Virmani said on July 12.

Mr. Virmani said there are new challenges facing the country and they will have to be dealt with. “Indian economy will grow at 7% plus minus point 0.5%… I expect that we are on track to grow at 7% for several years from today,” he told PTI in an interview.

Last month, the Reserve Bank of India (RBI) pegged the FY25 gross domestic product (GDP)growth rate at 7.2%. Responding to a question on the decline in private consumption expenditures in the last fiscal year, Mr. Virmani said it is actually recovering now.

“The effect of the pandemic was to draw down savings… and very different from previous financial shocks,” he said. Explaining further, Mr. Virmani said it is like what he calls a double drought situation.

“We also had, of course, El Nino last year, but what the pandemic did was that it resulted in people having to draw down their savings… So, the obvious reaction is to rebuild your savings, which tend to reduce current consumption,” he noted.

“If people were buying branded goods, they will buy less branded or ordinary goods and save part of that money,” he said, explaining that this shows a slide in consumption.

Mr. Virmani said history shows that coalition partners can slow privatisation in States in which the regional ally is in power, but that is not a big issue.

“I see no reason why privatisation cannot happen in the other States and it may also happen in these States (where coalition parties are in power). I am just giving you a historical example,” he said.

With support from N. Chandrababu Naidu’s Telugu Desam Party (TDP) and Nitish Kumar-led JD(U), along with other alliance partners, the NDA crossed the halfway mark in the recently held Lok Sabha elections to form the government at the Centre.

On the decline in foreign direct investments (FDI) to India, despite it being the fastest growing economy, Mr. Virmani said riskless return of investment is much higher in the U.S. and other developed countries than in emerging markets.

“As soon as interest rates begin to come down in the U.S., I expect the FDI into emerging markets, including India, to increase,” he said.

India’s Finance Minister Nirmala Sitharaman holds up a folder with the Government of India’s logo as she leaves her office to present the federal budget in the parliament, before the nation’s general election, in New Delhi, India, February 1, 2024.
| Photo Credit: REUTERS

The government under Prime Minister Narendra Modi should focus on adherence to fiscal prudence and continue on the fiscal consolidation path, suggested SBI Research ahead of the much-awaited full Budget for 2024-25 to be tabled on July 23 – the first Budget under Modi 3.0.

What is fiscal deficit?

The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings that may be needed by the government.

SBI Research suggested that the Centre should target a fiscal deficit of 4.9%, but it must not obsess too much over the fiscal stance. The Government intends to bring the fiscal deficit below 4.5% of GDP by the financial year 2025-26.

In the Interim Budget earlier this year, the Government has targeted a fiscal deficit of 5.1% of GDP for 2024-25. However, SBI Research believes that the Government may budget a fiscal deficit of less than “5% — may be 4.9% — for 2024-25” due to stellar growth in GST revenues and higher dividends from PSUs and RBI.

State borrowings

As the budgeted fiscal deficit gets lowered, the gross market borrowing of the government will also reduce to around ₹13.5 lakh crore in FY25 compared to ₹14.1 lakh crore in the interim budget and net market borrowing to ₹11.1 lakh crore against ₹11.8 lakh crore earlier, the report, authored and led by Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said. “This along with India’s inclusion in Global Bond indices will keep the yield curve movements anchored,” it added.

In 2023-24, the Government pegged the fiscal deficit target for FY2023-24 at 5.9% of gross domestic product (GDP). Later, it was downwardly revised to 5.8%.

The interim budget, tabled on February 1, took care of the financial needs of the intervening period until a government was formed after the Lok Sabha polls, after which a full budget was supposed to be presented by the new government in July.

FM Sitharaman to break record with sixth budget presentation

With this upcoming Budget Presentation,surpassed the record set by former Prime Minister Morarji Desai, who as finance minister, presented five annual budgets and one interim budget between 1959 and 1964.

Mrs. Sitharaman’s upcoming Budget speech would be her sixth.The government on July 6 announced the dates of the Budget session of Parliament which will start on July 22 and conclude on August 12.

As per the data, the economy expanded 8.2% in 2023-24 against a 7% growth in 2022-23. Representational file image.
| Photo Credit: Reuters

India’s economy grew 7.8% in the March quarter, pushing up the annual growth rate to 8.2%, according to official data released on May 31.

Growth in the January-March period was lower than the 8.6% expansion in the December quarter.

The gross domestic product (GDP) had expanded 6.2% in the January-March period of the 2022-23 fiscal year, according to data released by the National Statistical Office (NSO).

As per the data, the economy expanded 8.2% in 2023-24 against a 7% growth in 2022-23.

The NSO in its second advance estimate of national accounts had pegged the country’s growth at 7.7% for 2023-24.

China has registered an economic growth of 5.3%in the first three months of 2024.

 The Reserve Bank’s Annual Report for 2023-24 said that the Indian economy is navigating the drag from an adverse global macroeconomic and financial environment.
| Photo Credit: REUTERS

Indian economy is likely to grow at 7% in the current fiscal year starting April, the Reserve Bank of India (RBI) said in its annual report released on May 30.

The Indian economy, it said, expanded at a robust pace in 2023-24 (April 2023 to March 2024 financial year), with real GDP growth accelerating to 7.6% from 7.0% in the previous year – the third successive year of 7% or above growth.

“The real GDP growth for 2024-25 is projected at 7.0% with risks evenly balanced,” it said.

India’s GDP growth is robust on the back of solid investment demand which is supported by healthy balance sheets of banks and corporates, the government’s focus on capital expenditure and prudent monetary, regulatory and fiscal policies, the RBI said. The Reserve Bank’s Annual Report for 2023-24 said that the Indian economy is navigating the drag from an adverse global macroeconomic and financial environment.

Indian economy, the report said, is well-placed to step up growth trajectory over the next decade in an environment of macroeconomic and financial stability.

“As headline inflation eases towards the target, it will spur consumption demand especially in rural areas,” it said.

It further said the external sector’s strength and buffers in the form of foreign exchange reserves will insulate domestic economic activity from global spillovers.

The report, however, added that geopolitical tensions, geoeconomic fragmentation, global financial market volatility, international commodity price movements and erratic weather developments pose downside risks to the growth outlook and upside risks to the inflation outlook.

The RBI also emphasised that the Indian economy would have to navigate challenges posed by rapid adoption of AI/ML (artificial intelligence/machine learning) technologies as well as recurrent climate shocks.

The annual report is a statutory report of RBI’s central board of directors. The report covers the working and functions of the Reserve Bank of India for the April 2023-March 2024 period.

Bengaluru:

India’s economy likely grew at its slowest pace in a year in the January-March quarter due to weak demand, according to a Reuters poll of economists who said the possibility of growth significantly surpassing their forecasts was low.

The country’s gross domestic product (GDP) unexpectedly grew by 8.4% in October-December compared to a year earlier, thanks to a sharp drop in subsidies which provided an artificial boost to net indirect taxes. But economic activity, as measured by gross value added (GVA), showed a more modest 6.5% expansion.

Economists in the poll said that situation was unlikely to have been repeated in the last quarter.

Growth in Asia’s third-largest economy likely slowed to an annual 6.7% in January-March, more in line with the long-term GDP growth rate, according to a Reuters poll of 54 economists. GVA growth was expected to slow to 6.2%.

Most economists in the poll said growth likely slowed due to moderation in both the manufacturing and services sectors. They also cited a muted contribution from agriculture.

Forecasts for GDP growth were in a 5.6%-8.0% range. The data are due at 1200 GMT on May 31, just days before general election results will be announced on June 4. Prime Minister Narendra Modi is expected to win a rare third term in power.

“We expect some sanity to return,” said Kunal Kundu, India economist at Societe Generale. “Among the components, we do not expect any major improvement.”

Over two-thirds of economists who answered an additional question said the possibility of GDP growth significantly surpassing their forecast was low. The rest said it was high.

“Core inflation continuing to drop and recording the lowest growth since the onset of the pandemic is symptomatic of weak domestic demand,” Mr Kundu said.

Weaker growth in private consumption, which accounts for 60% of GDP, was also likely to appear in upcoming quarters.

Economic growth, which likely averaged 7.7% last fiscal year, was forecast to slow to 6.8% this fiscal year and 6.6% in the next, suggesting consistent 8% growth was still some distance away for the world’s fastest-growing major economy.

While most economists reckon 8% or higher growth is needed to generate adequate job growth for millions of young people joining the work force, some are skeptical that can be consistently achieved.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said 5-6% was a “reasonable” potential growth rate for India’s economy.

“For this potential to be reaped, though, reforms need to be pursued, and Modi 2.0 took some steps back on this front – a reversal of agriculture reforms, delay in the implementation of new labour codes and a broad turn away from regional trade agreements.”

A growing divergence between financial economists’ GDP forecasts and government estimates has also raised questions over how India measures growth.

The National Statistical Office (NSO) said it expected GDP growth to be 5.9% in the January-March quarter.

“I think there is a slight overestimation of the informal sector GDP…which is why things on the ground probably do not look as exuberant as the headline numbers suggest,” said Dhiraj Nim, economist at ANZ.

The informal sector contributes nearly half of the country’s GDP and employs about 90% of India’s workforce.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

United Nations:

 Indian economy’s growth rate projection for this year has been raised by 0.7 per cent to 6.9 per cent from the forecast made in January by the UN and it retains its position as the world’s fastest-growing large economy.

The better outlook is fueled by lower inflation, robust exports, and increased foreign investments, Hamid Rashid, the chief of the UN’s Global Economic Monitoring Branch, said on Thursday.

“The drivers (of higher projection) are very simple: inflation has come down significantly, and that means the fiscal position is not as constrained as in other countries,” he said at the release of the mid-year edition of the World Economic Situation and Prospects (WESP) report.

Exports, which is another element in the improved projection, have been “pretty robust” and India is also benefiting from more investments coming in from other Western sources while the flow to China is coming down, Rashid said.

“India has become an alternative investment source or destination for many Western companies,” he added.

Another factor benefiting India, he said, is the special import arrangement India has with Russia for oil that is lowering its cost, he said.

The WESP report also gave a positive picture of the employment situation, saying: “In India, labour market indicators have also improved amid robust growth and higher labour participation.”

It said that the women’s labour force participation has increased particularly in South Asia.

India’s growth projection for next year remains at 6.6 per cent, which was made in January.

Last year, the WESP report said, India’s economy grew by 7.5 per cent and in 2022 by 7.7 per cent when it received a big short-term boost coming out of the drastic Covid slowdown.

The report also revised the projection for the world economy this year to 2.7 per cent, an increase of 0.3 per cent from January.

“Most major economies have managed to bring down inflation without increasing unemployment and triggering a recession,” the report said adding a cautionary note, “However, the outlook is only cautiously optimistic as higher-for-longer interest rates, debt difficulties, and escalating geopolitical risks will continue to challenge stable and sustained economic growth”.

The developing economies on the whole are growing at a faster clip — clocking 4.1 per cent — than the developed economies which are expected to record only a 1.6 per cent growth rate this year.

However, the growth among developing countries is uneven, the WESP report stated.

While large developing economies like India, Indonesia and Mexico are benefiting from strong domestic and external demand, many African, Latin American and Caribbean economies are on a “low-growth trajectory” because of “lingering political instability”, higher borrowing costs and exchange rate fluctuations, it said.

China’s economy is projected to grow by 4.8 per cent this year, making it the second fastest-growing large economy.

The US economy is projected to grow by 2.3 per cent this year.

“Despite the most aggressive monetary tightening in decades, a scenario of hard landing of the United States economy has receded,” the report said.

Looking ahead, the WESP saw risks and opportunities in rapid technology changes.

“The breakneck pace of technological change — including in machine learning and artificial intelligence — presents new opportunities and risks to the global economy, promising to boost productivity and advance knowledge on the one hand, while exacerbating technological divides and reshaping labour markets on the other,” the report said.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

The fall in household savings has been at the heart of recent debates in India. The decline in household savings is brought about by a drastic reduction in net financial savings as the household net financial savings to GDP ratio attained a four-decade low. Figure 1 shows the broad trend in household savings, physical savings and gold, and net financial savings.

The sharp reduction in household net financial savings in 2022-23 has been associated with an overall fall in household savings despite marginal recovery in physical savings.

Interpreting lower financial savings

The net financial savings of the household is the difference between its gross financial savings and borrowing. The gross financial savings of a household is the extent to which its financial assets change during a period. The financial assets of households typically comprise bank deposits, currency and financial investments in mutual funds, pension funds, etc. Though household borrowing includes credit from non-bank financial corporations and housing corporations, the bulk of the borrowing comprises credit from commercial banks. In general, there are at least three distinct factors that can potentially bring about a reduction in household net financial savings.

First, households typically finance their additional consumption expenditure by increasing their borrowing or depleting their gross financial savings. By financing higher consumption expenditure at any given level of disposable income, lower net financial savings provide stimulus for aggregate demand and output in this case.

Also read: No small change: on the raising of returns on small savings schemes

Secondly, when households finance higher tangible (physical) investment by increasing their borrowing or depleting their gross financial savings. The reduction in net financial savings in this case stimulates aggregate demand and output through the investment channel.

Third, when interest payment of a household increases say due to higher interest rates, households can meet the increased burden through borrowing or through depleting gross financial savings thereby inducing a reduction in net financial savings.

The first factor hardly played any role in the sharp reduction in gross financial savings in 2022-23 as the consumption to GDP ratio remained largely unchanged between 2021-22 (60.95%) and 2022-23 (60.93%). The second factor played only a limited role. While the gross financial savings to GDP ratio declined by 3 percentage points (7.3% to 5.3%) in 2022-23, household physical investment to GDP ratio increased only by 0.3 percentage point (12.6% to 12.9%) during the same period. Though higher borrowing is partly financed by interest income from financial assets, it can be largely attributed to higher interest payments of the household in the recent period.

Figure 2 reflects this phenomenon by depicting the trend in household borrowing to income ratio, debt to income ratio and the ratio between household physical savings and gross financial savings.

The share of household borrowing in household (disposable) income registered a sharp spike in 2022-23. Such a rise in household liabilities was associated with a decline in the physical savings to financial savings ratio, indicating a change in household asset composition in favour of financial assets.

Implication of higher debt burden

The rise in household debt burden has two concerns for the macroeconomy.

The first concern is about debt repayment and financial fragility. Since the repayment capacity depends on the income flow, a key criterion for evaluating a household’s debt sustainability is the difference between interest rate and the income growth rate. On the flip side, the interest payments from the households are the interest income of the financial sector. If households fail to meet their debt repayment commitments, then it reduces the income of the financial sector and deteriorates their balance sheets, which in turn can have a cascading effect on the macroeconomy if the latter responds by reducing their credit disbursement to the non-financial sector.

Figure 3 shows the difference between the weighted average lending rate of scheduled commercial banks and the growth rate of gross national income.

Though the difference shows a declining trend since 2021-22, the indicator turned out to be negative in the 2023-24 period. The sharp reduction in interest rate and income growth gap is on account of lower income growth rate and higher lending rate of the commercial banks. The weighted average lending rate registered a sharp rise in the last two years, particularly due to the tight monetary policy stance of the RBI and the sharp rise in the call money rate during this period.

The second concern pertains to the implication on consumption demand. Over and above disposable income, the consumption expenditure of the household can be affected by their wealth, debt, and interest rate. Reduction in household wealth can lead to lower consumption expenditure as households may attempt to preserve their wealth position by increasing their savings.

Higher household debt can also reduce consumption expenditure in at least two ways. First, if higher household leverage is perceived as an indicator of higher default risk, then it may induce banks to indulge in credit rationing and reduce the credit disbursement. The consequent reduction in credit disbursement can adversely affect consumption. Second, higher debt can reduce consumption expenditure by increasing the interest burden, not to mention the effect of higher interest rates on consumption expenditure.

The Indian economy registered all these trends in the recent period. The financial wealth or the net worth of the household is the difference between the stock of financial assets and liabilities. As evident from figure 4, the financial wealth to GDP ratio of the household has registered a sharp decline in the recent period, along with a rise in leverage of the household as indicated by the rise in debt to net worth ratio.

Not surprisingly, the growth rate in private final consumption expenditure during 2023-24 registered a sharp decline as compared to 2022-23.

Macroeconomic implication

The implications of the procyclical leverage by the households along with the compositional change in the asset side of the balance sheet, albeit with a fall in the level of savings, for the stability of economic growth is concerning.

First, given that both the flow indicator of liabilities to disposable income and the stock indicator of debt to net worth shows an increasing trend makes the households vulnerable.

Second, the policy mantra of higher interest rate to counter inflation by reducing macroeconomic output and employment can leave households with an increasing level of debt in their balance sheets and potentially push the households into a debt trap. Third, the implications of high interest rate on debt burden can have an adverse impact on the consumption of the households and consequently for aggregate demand.

The household balance sheet trends indicate a broader change in the structure of the economy. The change in composition of the asset side of the household balance sheet towards financial assets indicate some degree of financialisation of the economy which moves from a production-based economy to a monetary or financial exchange-based economy making the five-trillion-dollar economy both jobless and fragile.

Zico Dasgupta and Srinivas Raghavendra teach economics at Azim Premji University.

Moody’s corporate headquarters in New York. File
| Photo Credit:
Reuters

Moody’s Analytics on April 12 projected India’s economy to expand 6.1% in 2024, lower than 7.7% growth clocked in 2023.

It said output in India remains 4% lower than it would have been without the COVID pandemic and its various aftershocks — from supply snags to military conflicts abroad.

“Economies in South and Southeast Asia will see some of the strongest output gains this year, but their performance is flattered by a delayed post-pandemic rebound. We expect India’s GDP to grow 6.1% in 2024 after 7.7% last year,” Moody’s Analytics said.

In its report titled ‘APAC Outlook: Listening Through the Noise’, Moody’s Analytics said the region overall is doing better than other parts of the world. “The APAC (Asia Pacific) economy will grow 3.8% this year, which compares with a growth of 2.5% for the world economy,” it said.

Moody’s Analytics said looking at the GDP relative to its trajectory prior to the pandemic shows that India and Southeast Asia have seen some of the largest output losses worldwide and are only beginning to recover. With regard to inflation, it said the outlook for China and India is more uncertain.

“Inflation in India is at the opposite extreme, with recent consumer price inflation rates hovering around 5%, close to the upper end of the Reserve Bank of India’s target range of 2 to 6% and without clear evidence of a trend towards slowing price pressures,” said the report authored by Stefan Angrick, Senior Economist, and Jeemin Bang, Associate Economist at Moody’s Analytics.

Earlier this month, the Reserve Bank said food price uncertainties continue to weigh on the inflation trajectory going forward, and retained 4.5% retail inflation projection for the current fiscal 2024-25.

“Continuing geopolitical tensions also pose upside risk to commodity prices and supply chains,” RBI said. RBI forecast June quarter inflation at 4.9% and September quarter at 3.8%. For December and March quarters, inflation is projected at 4.6% and 4.7%, respectively.

S&P said it forecast rate cuts of up to 75 basis points in India this fiscal. Photo: www.freepik.com

S&P Global Ratings on March 26 raised India’s growth forecast for the next financial year to 6.8%, but flagged restrictive interest rates as a dampener for economic growth.

The Indian economy is estimated to have clocked a growth of 7.6% in the current fiscal.

In November, last year, the U.S.-based agency had projected India’s growth to be 6.4% in 2024-25 fiscal on robust domestic momentum.

“For Asian emerging market [EM] economies, we generally project robust growth, with India, Indonesia, the Philippines, and Vietnam in the lead,” S&P said in its Economic Outlook for the Asia Pacific.

In largely domestic demand-led economies such as India, Japan, and Australia, the impact of higher interest rates and inflation on household spending power reduced sequential GDP growth in the second half, S&P said.

“We expect India’s real GDP growth to moderate to 6.8% in fiscal year 2025 [ending March 2025],” S&P said.

Restrictive interest rates are likely to weigh on demand next fiscal year, while regulatory actions to tame unsecured lending will affect credit growth. A lower fiscal deficit will also dampen growth, it added.

“Even as we expect a mild slowdown in Asian EM economies, we generally see solid domestic demand growth and a pick-up in exports to drive robust growth, with India, Indonesia, the Philippines and Vietnam in the lead,” S&P said.

It said high real policy rates will choke demand and are therefore likely to strengthen the case for lowering rates.

S&P said it forecast rate cuts of up to 75 basis points in India this fiscal. “In line with our projection for U.S. policy rates, we largely expect these moves to occur in the second half of the year,” it said.

In India, slowing inflation, a smaller fiscal deficit and lower U.S. policy rates will lay the ground for the Reserve Bank of India to start cutting rates. But we believe more clarity on the path of disinflation could push this decision at least to June 2024, if not later, S&P added.

Representational image of cargo ships at a harbour. Carbon tax on shipping will cut developing countries’ GDP by 0.13%
| Photo Credit: Reuters

The European Union, Canada, Japan and climate-vulnerable Pacific Island states are among 47 countries rallying support for a charge on the international shipping sector’s greenhouse gas emissions, documents reviewed by Reuters showed.

The documents, being discussed at an International Maritime Organization (IMO) meeting now entering a second week, outline four proposals with a combined 47 backers for imposing a fee on each tonne of greenhouse gas the industry produces.

ALSO READ | Understanding the EU’s carbon border tax 

Support for the idea has more than doubled from the 20 nations that publicly supported a carbon levy at a French climate finance summit last year.

Backers argue the policy could raise more than $80 billion a year in funding which could be reinvested to develop low-carbon shipping fuels and support poorer countries to transition. Opponents, including China and Brazil, say it would penalise trade-reliant emerging economies.

Those countries are competing to win over the dozens of others—including most African nations—that diplomats say have yet to take a firm stance on the issue. The IMO takes decisions by consensus, but can also do so by majority support.

The U.N. agency last year agreed to target a 20% emissions cut by 2030, and net zero emissions around 2050. While countries agreed in talks last week to continue negotiations on the emissions price, an official meeting summary noted they were “split on several issues” regarding the idea.

Albon Ishoda, IMO delegate for the low-lying Marshall Islands, said a levy was the only credible route to meet the IMO’s goals.

“If this does not get passed, what are the alternatives? Because we’ve already agreed to certain targets,” he said. “Are we going back to the drawing board?”

Shipping, which transports around 90% of world trade, accounts for nearly 3% of the world’s carbon dioxide emissions—a share expected to expand in the coming decades without tougher anti-pollution measures.

A proposal tabled by the Marshall Islands, Vanuatu and others—which despite their high reliance on shipping have demanded an emissions levy for years—proposes a charge of $150 per tonne of CO2.

Researchers have said a $150 carbon price could make investments in low-carbon ammonia-fuelled systems economic compared with conventional ships.

Disagreement

China, Brazil and Argentina pushed back on the idea of a CO2 levy in IMO talks last year. A study by Brazil’s University of Sao Paulo found a carbon tax on shipping would cut GDP across developing countries by 0.13%, with Africa and South America among the hardest-hit regions.

A Brazilian negotiator said Brazil and other developing countries were seeking a swift energy transition with the least disruptive effects on their economies, especially for countries that rely on sea-borne trade.

A proposal by Argentina, Brazil, China, and others advocates a global fuel emissions intensity limit, with a financial penalty for breaches, as an alternative. That would mean if countries fully complied with the fuel standard, no emissions would face the fee.

“We will not be in favour of a flat levy likely to hurt developing countries, but we would be in favour of a good levy only applied to the emissions over a certain benchmark,” the Brazilian negotiator said.

Despite differences of opinion, member states are still attempting to agree on global measures to avoid more countries targeting the industry on a national level.

That would fragment the market with varying local standards, and cause a headache for companies shipping goods globally.