Two crucial documents – the interim budget and the monetary policy – each with their futuristic estimates on the financial and monetary side are out. So, how is the economy doing and what to expect? We asked Dr C Rangarajan, economist and former governor of the Reserve Bank of India (RBI) and he says: “The Indian economy has been doing reasonably well but I do maintain that if we need to ensure a 7 per cent GDP growth in FY25 (2024-25) then the private sector investments need to pick up.”
Dr Rangarajan, who was also the former chairman of the Prime Minister’s economic advisory council, says, “the investment rate or the gross fixed capital formation rate has to be 35 per cent on an assumption of an incremental capital output ratio of 5. It is currently at around this level but is mainly because of the capital expenditures by the central government,” he says. But then, he reminds, the government alone cannot be increasing the capital expenditures and if the aim is to retain a 7 per cent GDP growth rate in 2024-25 then the private sector has to fill in and step-up investments. The good news apparently is that he finds signs of that and says, “we cannot be pessimistic. There is a possibility.”
On the inflation rate and the forecast of 4.5 per cent for 2024-25 (FY25), he says, the expectation that the inflation rate will fall to 4.5 per cent depends on what happens to the growth rate and to the liquidity situation. “If the current policy with respect to monetary actions is followed and if the growth rate continues to remain at 7 per cent next year then the inflation rate of 4.5 per cent can be reached.” He feels it is crucial for the monetary policy to continue to refrain from too much liquidity in the system.
Dr Rangarajan, has been among the first to highlight the directional shift in the nature of capital expenditures.
Much of it was in the context of the pandemic and driven by the need to improve the investment climate and act as a catalyst for greater investment by the private sector and to contribute towards capital formation.
Dr Rangarajan sees the just announced interim budget as also maintaining a continued emphasis on capital expenditures by the government. At the moment, he feels it may be possible for a 17 per cent capital expenditure growth in 2024-25 to enable a real GDP growth of 7 per cent but this would be contingent upon private sector investments picking up.