India is on the cusp of a long-awaited economic take-off: RBI

India is on the verge of an economic take-off, driven by increasing aggregate demand and higher non-food spending in the rural economy, according to the May Bulletin released by the Reserve Bank of India.

The report suggests that this may be partly because the demand within the country is increasing and partly because of a recovery in rural spending. It also highlights a slight drop in headline inflation in April 2024, which supports the belief that inflation is gradually aligning with the target despite it’s uneven and delayed pace.

This is happening at a time when the global backdrop is turning increasingly unstable, with there being no substantial decrease in inflation that threatens to tip global financial stability into another crisis worldwide. This has resulted in capital flows becoming unpredictable, with investors becoming more cautious and less willing to take risks. This means that investment across borders is at a stalemate where the produce of investment is unpredictable even to the investors. 

According to latest data, the rural demand for fast moving consumer goods (FMCG) has surged ahead of urban markets for the first time in over two years.

It primarily highlights an increasing demand in personal care and home products, resulting in an FMCG volume growth of 6.5%. Urban growth is comparatively at 5.7%, behind rural growth of 7.6%. 

According to the Economic Activity Index (EAI), which is a composite measure that tracks economic trends using twenty-seven high frequency indicators that can include metrics such as industrial production, retail sales, vehicle registrations and other such real-time data points to understand the economic activity better, there was a notable recovery in economic activity in April. The indicators also suggest a sustained momentum in domestic demand conditions. 

This rebound indicates that the economy is gaining momentum after previous slowdowns. Based on the EAI, it is projected that India’s GDP growth for the first quarter of the fiscal year 2024-25 will be around 7.5%— an incredible suggestion on the capabilities of the economic performance this early in the fiscal year. The reference points kept were scaled back to 100 in February 2020, a pre-pandemic benchmark, and 0 in April 2020— that reflected a sharp contraction in the economic activity due to pandemic-related mobility restrictions. 

According to the high frequency indicators for April 2024, the toll collections surged by 8.6% year-over-year while automobile sales saw a 25.4% increase, led by growth in the two-wheeler and three-wheeler segments. Passenger vehicles have also recorded their highest ever monthly sales.

It implies that the economical recovery to higher levels shows the resilience of the Indian economy, despite facing significant challenges such as geopolitical tensions and disruptions in supply chains.

“There is a growing optimism that India is on the cusp of a long-awaited economic take-off,” the authors note. This optimism is fuelled further by rising aggregate demand, that is the non-food spending, marking a development in personal consumption. The Nielsen IQ data supports this trend, indicating that personal consumption is recovering and seeing more opportunities within the country. 

RBI’s report has been divided into four articles, namely the State of the Economy, Decentralised Finance, Currency Swaps of the Reserve Bank of India and Consumer Confidence in India. All these articles address their concerns separately. It has been prepared by a team led by RBI deputy governor Michael Debabrata Patra. 

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