Private consumption, rural demand to drive growth in first quarter: RBI article

‘In April and first half of May 2023, domestic economic conditions have sustained the quickening of momentum seen in the last quarter of FY23’

FILE PHOTO: A man checks his phone outside the Reserve Bank of India (RBI) headquarters in Mumbai, India | Photo Credit: SHAILESH ANDRADE

Growth is expected to be driven in the first quarter of 2023-24 by private consumption, supported by reviving rural demand, and renewed buoyancy in manufacturing on easing of input cost pressures, Reserve Bank of India officials headed by deputy governor Michael Patra said in the May 2023 edition of the RBI Bulletin.

“The global economy is transfixed in the cross-currents of slowing growth and high inflation, and an uneasy calm prevails in the global financial markets as they await clearer signals from policy authorities on banking regulation and supervision, and contours of deposit insurance,” they wrote in the chapter titled State of the Economy.

But in April and the first half of May 2023, domestic economic conditions have sustained the quickening of momentum seen in the last quarter of 2022-23, they wrote.

Stating that headline inflation eased below 5% in April 2023 for the first time since November 2021, they said corporate earnings were beating consensus expectations, with banking and financial sectors posting strong revenue performance, aided by robust credit growth.

They said the RBI’s projections released in April 2023 indicate that real GDP may grow by 7.8% year-on-year (y-o-y), which works out to 13.7% above its pre-pandemic level (ie, compared with the corresponding quarter of 2019- 20).

“This projection embeds a negative momentum [(-) 1.7%] on a seasonally adjusted quarter-on-quarter (q-o-q) basis. This is typical of first quarter outturns, but the good news is that the magnitude of negative momentum is less than what it was in the first quarters of the preceding two years,” they said.

Thus, a gradual normalisation of the hit from the pandemic and the war is setting in, they wrote.

GDP growth in the first quarter of 2023-24 is expected to be driven by private consumption, supported by revival in rural demand that is underway on the back of the encouraging developments in both the kharif marketing season of 2022-23 and the rabi marketing season of 2023-24, the sustained buoyancy in services, especially contact-intensive sectors, and moderating inflationary pressures, they said.

“Investment activity is also expected to improve, drawing strength from the thrust on capital expenditure in public spending and moderation in commodity prices,” they added.

Moreover, with capacity utilisation in manufacturing straining at trend levels and above it in some industries, private capital spending will need to get stronger to add additional capacity as demand picks up, they felt.

“The manufacturing sector as a whole is expected to gain from softening input cost pressures. If services exports maintain their recent high profile, the drag from net external demand should moderate through April-June 2023,” they said.

Domestic service sector activity will continue to be led by the rebound in contact-intensive services and the resilience in construction activity, they added.

They said the CPI inflation print for April 2023 indicated that momentum is turning out to be softer than anticipated on account of a fall in wheat prices, the fifth consecutive monthly decline in prices of oils and fats and the third consecutive monthly decline in the prices of eggs.

Also, the prices of vegetables and fruits are also weathering the summer heat better and their momentum is lower than their historical record for this time of the year.

“Kerosene prices are on the decline and importantly, core inflation – CPI excluding food and fuel – is treading on softer momentum (seasonally adjusted) relative to the persistent elevation over the past 10 months,” they added.