An insightful article in the Reserve Bank of India’s (RBI) March monthly bulletin has thrown the spotlight on adverse weather conditions and extended geopolitical conflicts, warning that these twin challenges could threaten inflation stability in the near term. The analysis underscores that the consumer price index (CPI) inflation had settled at 4.9 percent in March after averaging 5.1 percent in the preceding two months, following a recent peak of 5.7 percent in December 2023.
Despite some hints of moderation, food inflation continues to be a concern, presenting a glaring risk to the disinflation path foreseen by the central bank. With summer on the horizon, vigilant monitoring is key as the country braces for the effects of food price shocks. The situation could potentially ease given the India Meteorological Department (IMD)’s forecast of an above-normal Southwest monsoon this year, which may alleviate food price pressures.
However, the RBI article, which encapsulates contributions from Deputy Governor Michael Patra among other central bank officials, points to potential inflationary pressures arising from extreme weather events and geopolitical tensions that might induce volatility in crude oil prices. The RBI clarified that the content reflects the authors’ opinions and not that of the institution itself.
The piece references the World Meteorological Organization’s (WMO) report titled “State of the Global Climate 2023,” which served a dire warning on global warming. As per the WMO, there’s a significant chance that 2024 will surpass the record set in 2023 as the hottest year on record, with the specter of a global freshwater shortage crisis looming large. The WMO emphasized the alarming uptick in extreme weather events and called for urgent, collective action.
This urgency is complemented by data from the IMD and corroborated by findings from both the Australian Bureau of Meteorology and the US National Oceanic and Atmospheric Administration, which indicate an increased likelihood of La Nina conditions post-June, potentially leading to prolific rainfall in India, whilst the El Nino phenomenon wanes.
Focusing on India’s economic prospects, the article points to current conditions that favor a continuation of the upward growth trajectory, which has seen real GDP growth surge above 8 percent during 2021-24. The authors argue that in order for India to meet its developmental goals over the next thirty years, the economy must grow at a rate of 8-10 percent per annum through the next decade. This trajectory is necessary to capitalize on the demographic dividend that began accruing in 2018 and is projected to continue until 2055.
The analysis posits that capital deepening is the driver behind India’s accelerated growth, led by consistent public investment and boosted by productivity enhancements. Bolstering these factors is the resurgence of private investment, as noted by the Asian Development Bank (ADB), which is adapting its investment strategy to make room for private sector funding. Indian corporates are well-positioned to contribute to this growth, given their strong credit ratings, reduced debt, robust domestic demand, and public capital expenditure.
As the article concludes, it highlights the importance of India’s young and burgeoning workforce as the cornerstone of the nation’s developmental strategy. The goal is to ensure that this labor force contributes optimally to Gross Value Added (GVA) growth, thereby enabling India to make a significant leap over the low middle-income threshold and achieve sustainable development in the decades to come.
