The key to lower inflation and higher infra-investment growth: RBI article

Among the global challenges, controlling inflation, improving infrastructure and macroeconomic stability are important for reviving and enhancing the animal spirit, according to an article published in the RBI Bulletin on Tuesday.

The article titled ‘State of the Economy’ mentions that the Indian economy has consolidated its recovery, with most of the components surpassing pre-epidemic level activity.

It said the cloud of geopolitical conflict in Europe overwhelms global economic potential, with risks tilting downward.

Commodity prices remain volatile at high levels and supply chains are disrupted. Inflationary pressures are mounting across geographical regions, and central banks are aggressively tightening monetary policy and liquidity.

“In this hostile international environment, the Indian economy has consolidated its recovery path,” it said, highlighting factors such as traction in activity in communications-intensive services, increasing consumer confidence and recording GST collections.

Inflationary pressures, in the April 2022 print of the Consumer Price Index (CPI), have become increasingly generalized across the product group, leading to a sharp rise in headline inflation to 7.8 percent – above the high tolerance band.

The article goes on to say that India faces the challenge of rebuilding from epidemic scars through greater investment in human capital health and productivity.

As the pace of digitalisation accelerates, the footprint of the unicorn ecosystem in India is expanding, reflecting a rapidly changing economy.

In order to achieve higher growth on a sustainable basis, the government needs to encourage private investment through high capital expenditures that crowd out private investment.

“Improving infrastructure, ensuring low and stable inflation, and maintaining macroeconomic stability are important to revitalize and encourage growth,” the article said.

“As the geopolitical tensions persist, the global outlook looks bleak, commodity prices continue to rise and the pace of financial housing withdrawals accelerates,” it says.

Emerging economies face the risk of capital outflows and high commodity inflation in print.

The central bank, however, said that the views expressed in the article did not represent the views of the authors and not necessarily those of the Reserve Bank of India (RBI).

In an off-cycle monetary policy review, the RBI raised its core debt rate by 40 basis points to control inflation.