Indian economy: Indian economy is on a firm footing: RBI annual report

“The outlook for the Indian economy remains bright, underpinned by a sustained

strengthening of macroeconomic fundamentals, robust financial and corporate sectors and a resilient external sector,” RBI said.

It projected a real GDP growth for 2024-25 at 7% for India, which turned out to be the world’s fastest growing major economy last year. The growth is expected to be supported by improved prospects for agriculture and rural activity following the ebbing El Nino and the expected above normal southwest monsoon.

The economy grew at 7.6% in 2023-24 against 7% in 2022-23, navigating the drag from protracted geopolitical tensions and volatile global financial markets.

Despite fall in exports in sync with lower global demand, India’s external sector gained strength with the narrowing of the current account deficit (CAD) and with foreign exchange reserves rising to all-time high.

The CAD moderated to 1.2% of GDP during April-December 2023 from 2.6 per
cent in the corresponding period a year ago, while foreign exchange reserves rose to $648.7 billion as on May 17, 2024, covering 11.4 months of imports and strengthening buffers against external sector risks and adverse spillovers..The government’s thrust on capex while pursuing fiscal consolidation, and consumer and business optimism augur well for investment and consumption demand, the central bank said. “Investment was the major driver of domestic demand, buoyed by government spending on infrastructure,” it said. The gross fixed capital formation rose to 10.2% in 2023-24 from 6.6% in the preceding fiscal.

RBI said investments under the production-linked incentive scheme are likely to gain further momentum and are expected to create new employment opportunities, improve labour incomes and strengthen domestic demand.

The economy will however have to withstand the heightened global uncertainty and an expected weaker global growth. “Geopolitical tensions, geoeconomic fragmentation, global financial market volatility, international commodity price movements and erratic weather developments pose downside risks to the growth outlook and upside risks to the inflation outlook,” RBI said.

The economy would also have to navigate the medium-term challenges posed by rapid adoption of artificial intelligence technologies and recurrent climate shocks.