RBI’s High Growth Forecast for 2024 Raises Skepticism Among Economists Amid Economic Slowdown Concerns

RBI’s High Growth Forecast for 2024 Raises Skepticism Among Economists Amid Economic Slowdown Concerns

The Reserve Bank of India’s (RBI) optimistic economic growth projection of 7.2% for the fiscal year ending March 2025 is sparking debate among economists who cite slowing economic indicators as reasons for caution. This forecast, which exceeds the government’s own growth projection of 6.5%-7%, also contrasts with more conservative estimates from global financial institutions, such as Goldman Sachs, which recently revised India’s growth outlook to 6.5%.

The RBI attributes its confidence to rising rural spending and an increase in private investment, both seen as stabilizers for the economy. Yet economists warn that sluggish urban consumption and falling exports could undermine these expectations. "The RBI’s forecast is higher than what a margin error around market forecast would allow,” said Dhiraj Nim, economist at Australia & New Zealand Banking Corp., adding that recent economic data does not strongly support the central bank’s optimistic stance.

Sectors including automotive, manufacturing, and travel have reported declines. Sales of passenger vehicles dropped for two consecutive months as of September, while air travel also saw three months of decline since June. Meanwhile, urban consumption weakness has hurt profits for major corporations such as Hindustan Unilever Ltd., a leader in consumer goods. CEO Rohit Jawa noted a “clear trend” of declining urban growth in recent quarters.

The central bank has maintained its key interest rate for nearly two years, with Governor Shaktikanta Das stating that a rate cut remains too risky given persistent inflation concerns. However, economists are cautioning that sustained high rates could further slow economic activity. "Monetary policy works with a lag, so the more time the RBI takes to cut rates, the greater time it will take to spread through the economy," said Teresa John, economist at Nirmal Bang Institutional Equities.

In the immediate term, the ongoing festival season is expected to drive a temporary rise in consumer spending, with festivities like Diwali accounting for up to 30% of annual sales for some businesses. However, economists caution that this seasonal demand boost may not be sustained in the months to follow. “There is hope that this Diwali will be lit, but the light might not last several quarters,” said RBL Bank economist Achala Jethmalani.

Rural markets, bolstered by strong monsoon performance and a bumper crop yield, are showing early signs of recovery. However, Tata Consumer Products Managing Director Sunil D’Souza noted that this upturn may not fully counterbalance the challenges in urban markets, where consumer spending is significantly higher.