RBI Annual Report 2022-23: Domestic economic activity faces challenges from uninspiring global outlook; real GDP growth for FY24 seen at 6.5%

RBI Annual Report 2022-23: Domestic economic activity faces challenges from an uninspiring global outlook going forward, but resilient domestic macroeconomic and financial conditions, expected dividends from past reforms, and new growth opportunities from global geo-economic shifts place India in an advantageous position, the Reserve Bank of India said in its Annual Report for 2022–23, released on May 30, Tuesday.

Taking into account softer global commodity and food prices, good rabi crop prospects, sustained buoyancy in contact-intensive services, the government’s continued thrust on capex, higher capacity utilisation in manufacturing, double-digit credit growth, a receding drag on purchasing power from high inflation, and rising optimism among businesses and consumers, real GDP growth for 2023–24 is projected at 6.5 per cent with risks evenly balanced, the report added. 

As regards inflation, the report said that risks to inflation have moderated with downward corrections in global commodity and food prices and an easing of the pass-through from high input cost pressures last year. The cumulative increase in policy repo rate by 250 basis points last year would steer the disinflationary process, along with supply-side measures to address transient demand-supply mismatch due to food and energy shocks.

With a stable exchange rate and a normal monsoon (unless an El Nino event strikes), the inflation trajectory is expected to move down over 2023–24, with headline inflation edging down to 5.2 per cent from the average level of 6.7 per cent recorded last year. Monetary policy remains focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth, the annual report said.

RURAL DEMAND

Rural demand, which was deeply scathed by the second wave of COVID-19 a year ago recovered, albeit at a slower pace, vis-à-vis urban demand. Real rural wage growth virtually stagnated in 2022-23 despite a visible uptick in economic activity. Although job demand under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) declined on a y-o-y basis,
it still prevailed above the pre-pandemic level in 2022-23, indicating that the recovery, especially in the unorganised segment of the economy is not yet complete.

Household spending was buoyant for both essential and non-essential items with an expectation of a rise in non-essential outlay over the next year.

INVESTMENT AND SAVING

The rate of gross domestic investment in the Indian economy, measured by the ratio of gross capital formation (GCF) to GDP at current prices, surged to 31.4 per cent in 2021-22 from the COVID-induced slump to 27.9 per cent in the preceding year. Although data on GCF are not yet available for 2022-23, movements in its constituents suggest an uptick primarily led by government
spending on infrastructure.

GLOBAL ECONOMIC REVIEW

The report notes that the flaring up of geopolitical hostilities followed by a tightening of financial conditions on account of aggressive monetary policy actions worldwide dampened global macroeconomic outcomes during 2022 amidst heightened uncertainty. After the short-lived Omicron wave and a successful inoculation drive on a worldwide scale, with 64.20 per cent of the world population fully vaccinated as on March 31, 2023, the resilience of the global economy stood out, causing the International Monetary Fund (IMF) to revise the estimate of global growth for 2022 to 3.4 per cent in April 2023 from 3.2 per cent in October 2022.

However, global trade (goods and services) growth for 2022 was revised down to 5.1 per cent in April 2023 from 5.4 per cent in January 2023. Global inflation remained uncomfortably high at 8.7 per cent in 2022, as against 4.7 per cent a year ago with inflation overshooting the target in an overwhelming majority of countries. Capital flows to emerging market economies (EMEs) remained subdued and volatile.