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Extreme weather condition pose risks to inflation: RBI Bulletin

India must grow at 8-10% per annum to reap demographic dividend

Extreme weather condition along with prolonged geopolitical tensions pose risks to inflation in the country, the Reserve Bank of India (RBI) said in its April 2024 Bulletin.

“The impact of food shock on core inflation has reduced over time while that of fuel shock has increased recently,” the RBI said.

India’s annual retail inflation based on the Consumer Price Index (CPI) eased to 4.9 per cent in March after averaging 5.1% in the preceding two months and a high of 5.7 per cent in December 2023.

“Food inflation, despite some signs of moderation, remains elevated and a potential source of risk to the disinflation trajectory,” the RBI said. In order to control inflation, the RBI sharply increased policy repo rate during 2022 and has kept it unchanged since February 2023.

The RBI noted that rate transmission is higher in public sector banks (PSB) than that of private banks. “The transmission across bank groups indicates that the increase in the deposit and lending rates was higher in the case of PSBs. The lending rates of PSBs continued to remain lower than those of private banks while their deposit rates were higher,” the RBI said.

A yellow alert for the heatwave has been sounded in Patna and several south and north-west regions between April 24-26. In the next three days, a surge of three to four degrees in temperature is likely to take place. A warning of hot days has been issued for 14 districts in the southwest and south-central regions. Meanwhile, the maximum temperature of 25 cities, including Patna, has been recorded below 40 degrees Celsius.

In the monthly bulletin, the RBI noted that the Indian economy must grow at a rate of 8-10 per cent per annum over the next decade to reap the demographic dividend.

“In order to achieve its developmental aspirations over the next three decades, the Indian economy must grow at a rate of 8-10 per annum over the next decade to reap the demographic dividend that started accruing from 2018 and, as calculations show, will last till 2055,” the RBI noted in the report.

Earlier this month, the RBI’s monetary policy committee pegged the current financial year GDP growth at 7 per cent. As per the official data, the country’s gross domestic product (GDP) is estimated to have grown by 7.6 per cent in FY 2023-24.

In the past 10 years, the average annual real GDP growth in India is less than 6 per cent. One of the key poll pitches of the ruling BJP is to make India a developed economy by 2047. RBI in its monthly report clearly states that India must grow at faster pace to achieve the developmental aspirations.

The economic growth in the post-pandemic years has been above 7 per cent. “So far, capital deepening is powering the step-up in the growth trajectory, led by sustained public investment, and supported by productivity improvements,” the RBI said.

According to the RBI, conditions are shaping up for an extension of a trend upshift in real GDP growth, backed by strong investment demand and upbeat business and consumer sentiments.

For India to harness its favourable demographics and achieve the escape velocity required to breach the low middle income barrier, the RBI underlined that the “developmental strategy over the next few decades must centre around extracting the maximum possible contribution of its young and rising labour force to the growth of gross value added (GVA).

India’s working age population is projected to expand at the rate of about 9.7 million per annum during 2021-31 and 4.2 million per annum during 2031-41. “The cutting edge of the growth strategy will be provided by a focus on labour quality,” the RBI’s report on ‘State of the Economy’ noted.

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