India's Growth Tends to Be "Fragile" with Disproportionate Dependence on Household Spending: RBI MPC Member

Reserve Bank of India (RBI)”s Monitory Policy Committee (MPC) member Jayanth R Varma is concerned about the country”s “disproportionate” dependence on household spending while other components of demand face headwinds. However, he is “a little more” optimistic about India”s economic growth than he was a few months ago.

The maverick Varma, who often takes bold stances in monetary policy meetings, said inflation may remain sticky for several quarters, with rates of 4% to 5% due to a growth shock.

“I am a little more optimistic about growth than I was 2-4 months ago. My cautious optimism stems from improved consumer confidence and various indicators that point to the continuation of the growth momentum,” he told PTI in a telephone interview.

The International Monetary Fund (IMF) has raised India”s growth outlook by 20 basis points to 6.3%, while keeping the global projection at 3%.

However, according to Varma, the guidance looks “fragile” as India is disproportionately dependent on household spending, while other components of demand are facing headwinds.

Moreover, as the macroeconomic scenario is sluggish, the resilience of private expenditure still appears dim. “Fiscal consolidation amounts to a withdrawal of the pandemic-era government spending stimulus,” Varma, currently a professor at the Indian Institute of Management, Ahmedabad, said.

India recorded a GDP growth of 7.2% in 2022-23, which is lower than the 9.1% in 2021-22. The RBI estimates that India will grow at 6.5% in the current fiscal year (FY 2024).

Varma is confident that the RBI can tackle inflation within the projected target range of 2-4%. However, it may remain sticky at 4-5% in the coming quarters.

“I am confident that we will achieve this goal, but I think it will take a few more quarters… We should be willing to accept inflation between 4% and 5% for several quarters as the price of avoiding a growth shock,” Varma said.

According to him, a more rapid reduction in inflation may dent growth prospects. As far as inflation is concerned, Varma believes that the Consumer Price Index (CPI) based retail inflation may further ease in October from 5.02% in September.

It was 6.83% in August due to exorbitant vegetable prices and lower monsoon and climate troubles.”