Finance Ministry's Blames RBI for Economic Slowdown
Moneylife Digital Team 27 December 2024
The Finance Ministry's monthly economic review blames the combination of Reserve Bank of India’s (RBI) tight monetary policy stance and macroprudential measures as responsible for the current demand slowdown. India’s GDP growth slowed to a near two-year low of 5.4% in the July-September quarter. In response to the slowdown, RBI implemented a significant policy adjustment by reducing the cash reserve ratio (CRR) from 4.5% to 4% in December 2024. This move aims to stimulate credit growth, which the ministry notes has decelerated "too much and quickly" in FY24-25. The central bank has maintained its key policy rate at 6.5% since February 2023, reflecting a careful balance between growth and inflation.
 
The ministry expresses optimism about growth prospects for the second half of FY24-25, citing several positive indicators. Rural demand shows resilience, evidenced by strong growth in two and three-wheeler sales (23.2%) and domestic tractor sales (9.8%) during October-November. Urban demand is also showing signs of recovery, with passenger vehicle sales growing by 13.4% year-on-year (y-o-y) in the same period, accompanied by robust growth in domestic air passenger traffic.
 
Inflation outlook appears more favourable, with the RBI projecting 4.8% for FY24-25, including Q3 at 5.7% and Q4 at 4.5%. November 2024 saw softening inflationary pressures, driven by lower food and core inflation. The ministry notes that healthy progress in rabi sowing suggests a promising harvest, which could help alleviate food inflation pressures. The downward trend in international crude oil prices is viewed positively, though elevated global edible oil prices remain a concern.
 
Looking ahead to FY25-26, the ministry identifies several emerging challenges. Global uncertainties and aggressive policies in major economies pose potential threats to domestic growth. The strength of the US dollar and potential policy rate adjustments in the United States have put pressure on emerging market currencies, including India's. The ministry emphasises that recent exchange rate movements may have reduced monetary policy flexibility for emerging economies.
 
The report also addresses structural factors contributing to the slowdown, particularly noting how corporate sector hiring and compensation practices have impacted urban consumption growth. Industrial activity is expected to gain traction, supported by the conclusion of the monsoon season and anticipated increases in government capital expenditure, especially in sectors like cement, iron, steel, mining, and electricity.
 
The ministry concludes that while India's growth outlook for FY25-26 appears promising when viewed through domestic economic fundamentals, it remains subject to fresh uncertainties in the global economic landscape. 
 
Comments
gopalakrishnan.tv
1 month ago
No point in blaming RBI. The fact remains that inflation is not under control and all forms of taxes like
complicated and hostile GST, Fuel taxes, irrational income tax, low interest on deposits, and high cost of living without a matching income are all factors contributing to very high prices and less demand for products and services . Added to these, corruption, black money , freebies, surge pricing, greedy pricing, and their cascading effects on all items of goods and services affect the demand and supply very badly impacting the economy in different ways.The fiscal policies do not encourage over all
mass consumption and demand. Laxity in Governance also affect the pricing of products and services resulting in mismatches in demand and supply . Time has come to have a very comprehensive review of all levies, pricing of goods and services . Monetary policy alone cannot help the growth of the economy ensuring price stability. Perfect coordination of fiscal policy and monetary policy keeping the overall objective and direction of the economic policy is the need of the hour.Wealth creation and wealth distribution should do full justice in reducing the inequality which influences the demand and consumption of goods and services. Concentration of wealth with a few has limitations on demand and consumption.
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