Due to reduction in prices of food items, the retail inflation rate based on Consumer Price Index (CPI) came down to 4.31 percent in the month of January, which is the lowest in the last 5 months. It was at 5.22 percent in the month of December, while in January 2024 it was at 5.1 percent. Earlier in the month of November, the inflation rate was at 5.48 percent.
Food items contribute about 50 percent to the inflation basket. Their inflation came down to 6.02 percent in January on a month-on-month basis. In December, it came down from 9.04 percent to 8.39 percent, which was at 8.30 percent in January 2024. At the same time, rural inflation came down from 5.95 percent to 5.76 percent in December and urban inflation also came down from 4.89 percent to 4.58 percent in December.
The biggest reason for the current decline is the sharp reduction in vegetable prices. According to the data, inflation in food and beverages was at 5.68 percent in January, while it was at 7.7 percent in December. Especially the prices of vegetables have come down from 25.6 percent to 11.35 percent, which has brought great relief to the common man. In the same sequence, the inflation of grains was at 6.24 percent in January, which was at 6.5 percent in December. The inflation of meat and fish came down to 5.25 percent in January, which was at 5.3 percent in December.
It is worth noting that in December, the Reserve Bank of India had lowered the inflation forecast for the financial year 2024-25 to 4.8 percent, whereas earlier the central bank had estimated it to be at the level of 4.5 percent. At the same time, inflation is expected to remain within the tolerance limit set by the Reserve Bank of India in the financial year 2025 and financial year 2026.
Inflation plays an important role in determining one’s purchasing power. When inflation increases, the prices of both goods and services increase, which reduces the purchasing power of a person and the demand for goods and services decreases. Then, their sales decrease, their production decreases, the company incurs losses, workers are laid off, employment generation decreases, etc. As a result, economic activities slow down, and the pace of development is hampered. In such a situation, it would be appropriate to say that the pace of development can be accelerated only by reducing inflation.
The National Statistical Office (NSO) has projected the GDP growth rate to be 6.4 percent in its first advance estimate of Gross Domestic Product (GDP) for the financial year 2024-25, which is lower than the last 3 financial years. During the last financial year, the GDP growth rate was 8.2 percent. At the same time, the Reserve Bank of India has projected GDP to grow at the rate of 6.6 percent during the financial year 2024-25. Earlier, the GDP growth rate was minus 6.60 percent during the financial year 2020-21. Subsequently, the GDP growth rate during the financial year 2021-22, financial year 2022-23 and financial year 2023-24 was 8.70 percent, 7.2 percent and 8.2 percent respectively, while in the first quarter of the financial year 2024-25 it was 6.7 percent and in the second quarter it was 5.4 percent.
However, despite the low GDP growth rate of India, the Indian economy is in a better position than the world’s most powerful country, US, and it is expected to remain strong in the coming years as well. The growth rate in US is estimated to be 2.7 percent during the financial year 2024 and 2.0 percent in the financial year 2025.
Meanwhile, India Industrial Production (IIP) growth rate declined to 3.2 percent in December 2024 due to weak performance of mining and manufacturing sectors. Also, the government has revised the IIP data for November 2024 from 5.2 percent to 5.00 percent.
In view of the slow pace of mining and manufacturing sector and the slow pace of GDP in the last two quarters, the government wants to increase the pace of development. Therefore, the budget has also emphasized on increasing investment, savings and consumption, because only by accelerating these can economic activities be accelerated and development can be accelerated.
To boost economic activities, the Reserve Bank of India reduced the repo rate by 0.25 percent in the monetary policy review conducted on February 7, bringing it down from 6.50 percent to 6.25 percent. It is worth noting that the repo rate has been reduced after about 5 years. The central bank was avoiding reducing the repo rate till now mainly due to inflation.
After having loan growth between 14 percent and 16 percent in the last two years, overall credit growth has been slowing down for the last few months and it has come down to 11.2 percent in December 2024. A major reason for this is the high lending rate. Banks do not have cheap capital. Therefore, they are forced to lend at high rates and due to the availability of loans at high rates, common people and businessmen are avoiding taking loans. Because of this, companies are short of capital, due to which they are not able to produce at full capacity.
Due to reduction of 0.25% in repo rate by Reserve Bank of India, banks will get capital at cheaper rate and they will be able to give loan at cheaper rate and when loan is available at cheaper rate, then both common people and businessmen will take loan, due to which both investment and savings will increase and consumption will increase along with increase in economic activities.
In the budget, the government has clearly stated that its aim is to accelerate development. Despite the GDP growth rate falling in two quarters, the Indian economy remains strong, and India’s growth rate is also higher than that of developed countries. Therefore, to further increase the growth rate, the Reserve Bank of India has cut the repo rate. Owing to the reduction in inflation in the month of January, the way has been cleared to cut the repo rate in the upcoming monetary reviews, which will boost the country’s growth pace.
Satish Singh, Ahmedabad Based Senior Columnist, views are personal.
