Economic Survey 2023-2024: Monetary Management and Financial Intermediation- Stability is the Watchword

Global economic growth has been 3.2 per cent in 2023 as per the April World Economic Outlook. Diverging growth patterns have emerged among countries. The stark difference in the growth performance of countries has been on account of domestic structural issues, uneven exposure to geopolitical conflicts and the impact of monetary policy tightening.
India’s economy carried forward the momentum it built in FY23 into FY24 despite a gamut of external challenges. India's real GDP grew by 8.2 per cent in FY24, exceeding 8 per cent mark in three out of four quarters of FY24. The focus on maintaining macroeconomic stability ensured that external challenges had minimal impact on India’s economy.
The Government’s thrust on capex and sustained momentum in private investment has boosted capital formation growth. Gross Fixed Capital Formation increased by 9 per cent in real terms in 2023-24.
Moving forward, healthier corporate and bank balance sheets will further strengthen private investment. The positive trends in residential real estate market indicate that the household sector capital formation is increasing significantly.
Inflationary pressures stoked by global troubles, supply chain disruptions, and vagaries of monsoons have been deftly managed by administrative and monetary policy responses. As a result, after averaging 6.7 per cent in FY23, retail inflation declined to 5.4 per cent in FY24.
The fiscal balances of the general government have improved progressively despite expansionary public investment. Tax compliance gains driven by procedural reforms, expenditure restraint, and increasing digitisation helped India achieve this fine balance.
The external balance has been pressured by subdued global demand for goods, but strong services exports largely counterbalanced this. As a result, CAD stood at 0.7 per cent of the GDP during FY24, an improvement from the deficit of 2.0 per cent of GDP in FY23.
Indian economy has recovered and expanded in an orderly fashion post pandemic. The real GDP in FY24 was 20 per cent higher than its level in FY20, a feat that only a very few major economies achieved. Prospects for continued strong growth in FY25 beyond look good, subject to geopolitical, financial market and climatic risks.

Chapter 2: Monetary Management and Financial Intermediation- Stability is the Watchword

India’s banking and financial sectors have displayed a stellar performance in FY24.
Double-digit and broad-based growth in bank credit, gross and net non-performing assets at multi-year lows, and improvement in bank asset quality highlight the government’s commitment to a healthy and stable banking sector.
Primary capital markets facilitated capital formation of ₹10.9 lakh crore during FY24 (approximately 29 per cent of the gross fixed capital formation of private and public corporates during FY23).
The market capitalisation of the Indian stock market has seen a remarkable surge, with the market capitalisation to GDP ratio being the fifth largest in the world.
Strategy for financial inclusion has been a target-based approach, market development, strengthening infrastructure, innovation, and technology, last-mile delivery, consumer protection and financial literacy and awareness.
Financial inclusion strategy in the country has placed emphasis on the usage of accounts by enhancing direct benefit transfer flows through these accounts, promoting digital payments using RuPay cards, UPI etc.
Commercial banks and insurance companies, even as they aim to achieve greater market penetration, must keep in mind levels of financial literacy in the country, avoid over lending mis selling and address grievances such that the financial cycle stays healthy as long as possible.
As India’s financial sector undergoes critical transformation, it must brace for likely vulnerabilities originating globally or locally, the government and regulators have to be agile and flexible to intervene with policy and regulatory levers, as required.

Chapter 3: Prices and Inflation - Under Control

Inflation moderated in FY24

During FY22 and FY23, the COVID-19 pandemic, geopolitical tensions, and supply disruptions contributed to rising inflationary pressures globally. In India, consumer goods and services faced price hikes due to international conflicts and adverse weather conditions impacting food costs.
However, in FY24, the Central Government’s timely policy interventions and the Reserve Bank of India’s price stability measures helped maintain retail inflation at 5.4 per cent - the lowest level since the pandemic.

The policy interventions yielded positive results

The global energy price index experienced a sharp decline in FY24. On the other hand, the Central Government announced price cuts for LPG, petrol, and diesel. As a result, retail fuel inflation stayed low in FY24.
In August 2023, the price of domestic LPG cylinders was reduced by ₹200 per cylinder across all markets in India. Since then, LPG inflation has been in the deflationary zone, starting from September 2023.
Similarly, in March 2024, the Central Government lowered the prices of petrol and diesel by ₹2 per litre. Consequently, retail inflation in petrol and diesel used in vehicles also moved to the deflationary zone in March 2024.
India’s policy adeptly steered through challenges, ensuring price stability despite global uncertainties

Core inflation declined to 4-years low

The decrease in retail inflation in FY24 was driven by a fall in core inflation - both goods and services. Core services inflation eased to a nine-year low in FY24; at the same time, core goods inflation also declined to a four-year low.
In FY24, core consumer durables inflation declined due to an improved supply of key input materials to industries. This was a welcome change after the progressive increase in consumer durables inflation between FY20 and FY23.
The transmission of monetary policy to core inflation was unambiguous. In response to rising inflationary pressure, the RBI has increased the repo rate gradually by 250 basis points since May 2022. Consequently, core inflation declined by around four percentage points between April 2022 and June 2024.

Food prices are under pressure due to adverse weather conditions

Food inflation has been a global concern over the past two years. Within India, the agriculture sector faced challenges due to extreme weather events, depleted reservoirs, and crop damage, which impacted farm output and food prices. Consequently, food inflation stood at 6.6 per cent in FY23 and increased to 7.5 per cent in FY24.
Unfavorable weather conditions in FY24 constrained food production. Tomato prices rose due to region-specific crop disease, early monsoon rains, and logistical disruptions. Onion prices spiked because of rainfall during the last harvest season affecting rabi onion quality, delayed sowing of Kharif onion, prolonged dry spells impacting Kharif production, and trade-related measures by other countries.
However, the government took appropriate administrative actions, including dynamic stock management, open market operations, subsidised provision of essential food items and trade policy measures, which helping to mitigate food inflation.

Higher inflation in States correlated with a wider rural-to-urban inflation gap

In FY24, most States and Union Territories witnessed decreased inflation rates, with 29 out of 36 recording rates below 6 per cent - consistent with the overall decline in all-India average retail inflation compared to FY23.
States with elevated food prices tend to experience higher rural inflation due to the greater weightage of food items in the rural consumption basket. Additionally, inter-state variation in inflation is more pronounced in rural areas than urban areas.
Besides, States experiencing higher overall inflation tend to have a wider rural-to-urban inflation gap, with rural inflation surpassing urban inflation.

The short-term outlook is positive, long term requires a clear vision

Going forward, the RBI projects inflation to fall to 4.5 per cent in FY25 and 4.1 per cent in FY26, assuming normal monsoon and no external or policy shocks. Similarly, the IMF forecasts inflation of 4.6 per cent in 2024 and 4.2 per cent in 2025 for India.
Further, the World Bank predicts declining global commodity prices in 2024 and 2025, driven by lower energy, food, and fertiliser prices. This may help bring down domestic inflation in India.
However, achieving long-term price stability requires a clear forward-looking vision. Hence assessing progress in developing modern storage and processing facilities for fruits and vegetables is crucial to manage seasonal price spikes.
Beyond this, the medium to long-term inflation outlook will be shaped by the strengthening of price monitoring mechanisms and market intelligence as well as focused efforts to increase the domestic production of essential food items like pulses and edible oils for which India has a great degree of import dependence.

Chapter 4: External Sector - Stability Amid Plenty

India’s external sector remained strong amidst on-going geopolitical headwinds accompanied by sticky inflation.
India’s rank in the World Bank’s Logistics Performance Index improved by six places, from 44^th in 2018 to 38^th in 2023, out of 139 countries.
India is adding more export destinations, signalling regional diversification of exports.
The moderation in merchandise imports and rising services exports have improved India’s current account deficit which narrowed 0.7 per cent in FY24.
India’s services exports grew by 4.9 per cent to USD 341.1 billion in FY24, with growth largely driven by IT/software services and ‘other’ business services.
India is the top remittance recipient country globally, with remittances reaching a milestone of USD 120 billion in 2023.
India witnessed positive net foreign portfolio investment inflows in FY24 supported by strong economic growth, a stable business environment, and increased investor confidence.
At the end of March 2024, India’s forex reserves were sufficient to cover more than 10 months of its projected imports for FY25 and 98 per cent of its external debt.
India’s external debt has been sustainable over the years, with the external debt to GDP ratio standing at 18.7 per cent at the end of March 2024.
Challenges such as slowing global GDP growth (i.e, fall in global demand) and an all-time rise in trade protectionism (i.e, weakening globalisation) can pose a significant downside risk. In this context, both the government and the private sector must focus on removing barriers and implementing steps to boost India’s expert competitiveness.