Another notable worry for the RBI is the overheating observed in specific retail sectors. In the previous month, the RBI raised risk weights on unsecured loans and banks' funding to NBFCs.
The Reserve Bank of India's (RBI) increase in the real GDP estimates from 6.5 percent to 7.0 percent has enhanced the outlook for stronger economic growth. While the adjusted GDP projection for 2023-24 is slightly below the 7.2 percent in 2022-23, it reflects a substantial upward trend, signaling a positive trajectory. The Indian economy demonstrated a robust recovery, rebounding from the 5.8 percent contraction in 2020-21 to growth rates of 9.1 percent in 2021-22 and 7.2 percent in 2022-23.
At the beginning of the year, the RBI forecasted a real GDP growth rate of 6.5 percent for both 2023-24 and 2024-25. In September, Chief Economic Advisor V Anantha Nageswaran stated that the Indian economy is anticipated to achieve an average annual growth rate of 6.5 percent between 2023 and 2030. The question arises: can the Indian economy sustain this heightened momentum of 7 percent or more in the upcoming years? Several risks exist that could potentially hinder the current growth trajectory.
Elevated inflation and rising interest rates remain concerns. Despite a 250 basis points repo rate hike, monetary transmission is still ongoing. RBI Governor Shaktikanta Das noted that households are feeling the impact, and inflation has not yet aligned with the 4 percent target set by the MPC for sustainable economic growth. The RBI projects CPI inflation at 5.4 percent for 2023-24, with uncertainties like unpredictable food inflation, crude oil price volatility, and market uncertainties posing risks to the outlook.
Increased risk weights:
The RBI's additional concern involves overheating in specific retail sectors. Recently, the RBI raised risk weights for unsecured loans and banks' funding to NBFCs, elevating the capital allocation requirement for both. Reports also indicate a rise in delinquencies in small loan segments, prompting some players to limit future growth. Notably, MSMEs, business loans, and other segments are experiencing above-average growth, which could draw the RBI's attention in the future.
Government capex contraction:
Following the pandemic, the fiscal deficit surged to 9.3 percent of GDP in 2020-21, allowing increased spending in subsequent years. Fiscal deficits were 6.7 percent in 2021-22 and 6.4 percent in 2022-23, leading to government capex reaching Rs 10 lakh crore. However, the government is now on a fiscal consolidation path, targeting a fiscal deficit of 5.9 percent in 2023-24 and aiming for 4.5 percent by 2025-26. This trajectory will significantly reduce the percentage share of GDP allocated to government capex in the coming years.
Private capex remains sluggish:
Despite banks and corporates enjoying favorable conditions in terms of asset quality, capital, and cash reserves, private capital expenditure is not increasing as expected. While some large corporate entities are investing, it's not widespread, given that capacity utilization is still hovering around 70 percent. The slowdown in the global economy is also contributing to this, as corporations adopt a cautious "wait-and-watch" approach. As government capex is anticipated to decelerate, a resurgence in private capex would be crucial for sustaining growth momentum, but it has yet to materialize.
Addressing geopolitical challenges:
Geopolitical tensions are creating an atmosphere of uncertainty for the financial system. Conflicts such as the Russia-Ukraine conflict and the Israel-Hamas war have disrupted supply chains and influenced prices. The repercussions are already evident, including currency depreciation and the strengthening of the dollar. The Governor highlighted that emerging market economies (EMEs) are grappling with volatile capital flows in the face of these geopolitical challenges.
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