Economy recovering from slowdown seen in Q2: RBI

Mumbai PTI: The Indian economy is recovering from the slowdown in momentum witnessed in the September quarter, driven by strong festival activity and a sustained upswing in rural demand, according to a Reserve Bank of India (RBI) bulletin released on Tuesday. An article on the 'State of the Economy' in the December bulletin noted that the global economy continues to exhibit resilience with steady growth and moderating inflation. "High frequency indicators (HFIs) for the third quarter of 2024-25 indicate that the Indian economy is recovering from the slowdown in momentum witnessed in Q2, driven by strong festival activity and a sustained upswing in rural demand," it said.

The article further said the growth trajectory is poised to lift in the second half of 2024-25, driven mainly by resilient domestic private consumption demand. "Supported by record level foodgrains production, rural demand, in particular, is gaining momentum. Sustained government spending on infrastructure is expected to further stimulate economic activity and investment," the authors said. Global headwinds, however, pose risks to the evolving outlook for growth and inflation, said the article authored by a team led by RBI Deputy Governor Michael Debabrata Patra. India's GDP growth slowed to a seven-quarter low of 5.4 per cent during the July-September period of the current fiscal year. The article said that from the expenditure side, the major factor contributing to the decline in the growth rate of the economy is fixed capital formation and from the production side, the main concern is manufacturing.

"Undermining both is inflation. The erosion of purchasing power due to repeated inflation shocks and persisting price pressures is starkly reflected in weakening sales growth of listed non-financial nongovernment corporations," it said. Their outlook on demand conditions also remains subdued as no let-up in the incidence of price shocks seems to be in sight; they will increasingly be inclined to pass on input costs to selling prices. Consequently, there is no robust capacity creation by investing in fixed assets. Instead, corporations are churning and utilising existing capacity to meet the inflation-dented consumer demand, the article said.

Sops granted by states may divert resources

Sops announced by several states in their 2024-25 Budgets may divert resources away from critical social and economic infrastructure development, an RBI article said on Tuesday. The gross fiscal deficit as per cent of budget estimate moderated in April- September 2024-25 over H1:2023-24 in case of both Centre and states, primarily on account of robust receipts, deceleration in their revenue expenditure growth and decline in capital expenditure, the article published in December RBI Bulletin said.

This provides fiscal room to them to boost capex in the latter half of 2024-25 which would aid in sustaining the post pandemic gains in expenditure quality and support medium-term growth prospects.However, several states have announced sops in their 2024-25 Budgets; such spending may divert resources away from critical social and economic infrastructure development, it said.

Many states, including Haryana, Punjab, Maharashtra, and Jharkhand have announced sops including free electricity to agriculture and households, free transport, allowances to unemployed youth and monetary assistance to women. The views expressed in the article are of the authors and do not represent the views of the Reserve Bank of India, a disclaimer said. According to the article, the Centre recorded higher tax collections, both direct and indirect, and the buoyancy is expected to continue.