Statsguru: Six charts explain India's uneven economic recovery

India’s central bank, the Reserve Bank of India (RBI), said last week that consumer price inflation would not be as high in the coming fiscal year as earlier expected. While the RBI had said it could be around 5 per cent in the first half of 2022-23 (FY23), most agencies were expecting that level for the full year. The RBI’s Monetary Policy Committee (MPC) in its last meeting for FY22 projected the annual consumer inflation at 4.5 per cent for FY23, and close to 4 per cent in the second half of the year (chart 1). 

The MPC was also conservative in its growth outlook. It expects real gross domestic product (GDP) growth of 7.8 per cent in FY23, with growth moderating to below 5 per cent in the second half of the year (chart 2). This is clearly a deceleration when one compares it with 8.8 per cent real GDP growth in FY22 (after adjusting for revised real GDP of FY21, first advance estimates for real GDP growth in FY22 falls from 9.2 per cent to 8.8 per cent). The next year would thus be characterised by slowing growth and softening inflation, according to the RBI. This may well be the reason why RBI is taking a route different from most emerging market central banks. Most of them have raised interest rates to contain inflation (chart 3). 

A key reason for lower than expected inflation projections could be weak demand. Two-wheeler and passenger vehicles sales, which were slowly recovering till the festive season of 2021, have again started dropping. Indexing sales to January 2019 (which was close to peak sales), we find that two-wheeler sales are 33 per cent lower, while PV sales are down 19 per cent (chart 4). Housing sales in top cities, however, recovered in the latest quarter (October-December 2021). 

If the overall demand does not fire up, capacity utilisation, which was below 70 per cent even in the run up to 2021 festive season (chart 5), may not increase. Unless capacity use improves, new investments will not materialise. In terms of cost of money, the term premium has been rising. Rising term premium means costlier debt even as the policy rate has remained unchanged (chart 6).

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