5G rollout can unleash Indian economy’s growth potential

5G, state of indian economy
The rollout of 5G technology has helped Indian economy weather global headwinds, heralding a new era of growth, says RBI's State of the Economy report.

The Reserve Bank of India is optimistic about the prospects of the Indian economy even in the face of the ongoing geopolitical tensions that threaten global growth. RBI’s state of the economy report says that the Indian economy is holding up well and the growth momentum is likely to remain buoyant in the second half of the year due to positive sentiment among consumers and businesses. There are several factors that are expected to contribute to the strengthening India’s position as the fastest-growing major economy in the world. However, the central bank has cautioned about the looming risk of inflation, which necessitates an active inflation targeting by the monetary policy.

The Monetary Policy Committee of the RBI has observed that unprecedented food price shocks are affecting the trajectory of inflation. This calls for the MPC to remain on high alert, given the current environment of elevated global food and energy prices and volatility in global financial markets. Consequently, in its bi-monthly MPC meeting on October 6, the RBI decided to keep the benchmark interest rate (repo rate) unchanged at 6.5%. India’s headline inflation is currently above the RBI’s upper tolerance limit of 6%.

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Threat of sticky inflation

What is causing persistent inflation? Firstly, international conflicts have led to increased energy prices, and the soaring crude oil prices are contributing to higher inflation. Commenting on the October monetary policy review, the report says that inflation has remained above the upper tolerance level for two consecutive months. However, the headline inflation is expected to gradually ease from its September peak, although it may remain stubbornly high due to slowing momentum and favourable base effects.

The short-term outlook for inflation is expected to improve thanks to corrections in vegetable prices and recent reductions in liquefied petroleum gas prices. Over the long-term, the inflation trajectory will depend on various factors, including reservoir levels, El Niño conditions, reduced cultivation of pulses, and fluctuations in global energy and food prices.

Positive economic activity is a cause for celebration even against the backdrop of a challenging global environment. The domestic economic activity in India has demonstrated resilience, with projected growth at 6.5% during 2023-24. Private sector investment is also gaining momentum as input costs ease. All of these factors are likely to position India as a new growth engine for the world, supported by its robust domestic macroeconomic fundamentals and buffers.

With the upcoming festival season, e-commerce sales volumes are set to soar. Previous months have also seen strong performance with a broad-based increase in high-frequency indicators in August and September. Rural demand, which plays a crucial role in retail sales, is also showing positive signs, with rural consumers ready to participate. There is a revival in demand for fast-moving consumer goods (FMCG), and auto sales have rebounded despite higher freight and packaging costs. The report highlights that the increased acreage for kharif sowing has led to a reduction in rural unemployment in September.

The report emphasises recent developments such as the rollout of 5G technology which are inspiring confidence in the prospects of the Indian economy. The 5G services are available in several Indian cities on October 1, 2022, and it is expected to be a game changer for the Indian manufacturing and services sectors, offering high data speeds, low latency, high-quality video services, and highly reliable communications. Additionally, 5G technology has social benefits, including tele-surgeries, real-time disaster monitoring, precision agriculture, and reducing human involvement in hazardous industrial operations such as deep mining and offshore activities.

There are concerns about the strengthening of the dollar as it continues to rise on the back of surging treasury yields. This creates a challenging situation for India’s strong macroeconomic fundamentals, as it faces the dual challenges of rising international interest rates and a strengthening dollar. The result is imported inflation and a depreciating rupee.

This situation poses a global risk, as it tightens already stringent financial conditions, despite India’s foreign exchange reserves experiencing significant growth during the calendar year 2023, increasing by $22 billion. As of the week ending October 6, India’s foreign exchange reserves stood at $584.7 billion. Despite elevated US treasury yields and a stronger dollar, the Indian rupee has exhibited low volatility and stable movements compared with its peers.

While the global economy has lost some sheen in the third quarter of 2023, there are still some outlier economies that remain resilient. Several emerging market economies, especially in Asia, have surprised with positive growth figures. These countries are weathering formidable global headwinds that are causing capital flows to exit their equity and debt markets, exerting downward pressure on their currencies.

Looking ahead, rising crude oil prices are undermining the overall prospects of these economies, making them vulnerable to sell-offs and safe-haven flights, exacerbated by increasing food prices and geopolitical tensions. Furthermore, high crude oil prices are likely to keep monetary policy authorities on alert for an extended period. Fiscal authorities in many countries have the power to impact the global economy by affecting its primary engines, notably the US, as highlighted in the report.