Shaktikanta Das: India at an inflection point - some thoughts
Inaugural address by Mr Shaktikanta Das, Governor of the Reserve Bank of India, at
the Annual Financial Institution Benchmarking and Calibration (FIBAC) 2024
Conference, organised jointly by the Federation of Indian Chambers of Commerce and
Industry (FICCI) and the Indian Banks' Association (IBA), Mumbai, 5 September 2024.
* * *
I am happy to be back at the FIBAC annual conference. This conference is special as it
brings together industry leaders, financial sector players and regulators on a single
platform to discuss vital issues of contemporary relevance. I would like to congratulate
the FICCI and the IBA for organising this annual conference.
The Indian economy is now at a critical juncture. Massive changes are taking shape in
various economic sectors and markets; and the country is geared for orbital shifts. Our
nation's journey towards becoming an advanced economy is drawing strength from a
unique blend of factors: a young and dynamic population, a resilient and diverse
economy, a robust democracy, and a rich tradition of entrepreneurship and innovation.
In this background, I have chosen to speak on the topic "India at an Inflection Point:
Some Thoughts". I have structured my talk under four major themes. First, I would
speak on India's growth prospects and the approach that we need to follow going
forward. Second, I would dwell upon recent developments in inflation and monetary
policy. Third, I propose to highlight certain issues relating to strengthening our financial
sector. Finally, I would spell out certain expectations from the financial sector.
I. Growth Prospects
The Indian economy rebounded strongly from the COVID-19 induced contraction,
growing at an impressive annual average rate of 8.3 per cent during the last three
years. For the current financial year, the Reserve Bank has projected a growth rate of
7.2 per cent. The IMF has also revised India's GDP growth upwards to 7.0 per cent,
citing improved prospects for private consumption, particularly in rural areas. Two days
ago, the World Bank has also upgraded India's growth forecast to 7.0 per cent for
202425.
The National Statistical Office (NSO) has placed India's GDP growth at 6.7 per cent in
Q1 of 2024-25. Notwithstanding the moderation in growth from the previous quarter and
below our projection for Q1, the data shows that the fundamental growth drivers are
gaining momentum. This gives us confidence to say that the Indian growth story
remains intact .
Private consumption, which is the mainstay of aggregate demand with a share of
around 56 per cent in GDP, has rebounded to 7.4 per cent growth from a feeble 4 per
cent growth in the second half of the previous year. This reconfirms the revival of rural
demand. The other important driver of growth, i.e., investment, which accounts for
around 35 per cent of GDP, grew at 7.5 per cent, keeping up with its recent momentum.
Thus, more than 90 per cent of GDP expanded at a robust pace and materially above 7
per cent. The headline number, however, came lower against the backdrop of muted
government expenditure of both the Centre and the States, perhaps due to the Lok
Sabha elections. Excluding government consumption expenditure, GDP growth works
out to 7.4 per cent.
On the supply side, while agriculture grew modestly at 2 per cent in Q1, it is likely to
perform better, going forward, on the back of good progress of monsoon, improved
kharif sowing, and good moisture conditions for rabi crops. Industry and services
recorded a growth of 7.4 per cent and 7.7 per cent respectively in Q1, underscoring
continued strength in economic activity. Construction activity remained robust growing
at 10.5 per cent.1
2
According to the RBI's latest data , bank credit to agriculture and allied activities
remained robust and increased by 18.1 per cent (y-o-y). Credit to industry surged by
10.2 per cent (y-o-y) in July 2024 as compared to 4.6 per cent in July 2023. Within
industry, credit to MSMEs also grew at 14.4 per cent (y-o-y). Bank credit to industries
such as chemicals and chemical products; food processing; petroleum, coal products
and nuclear fuels; and infrastructure has been quite strong in July 2024. The enhanced
credit flow to industry along with an all-time high-capacity utilisation points to an upturn
in the investment cycle, as reflected in the NSO data.
It is evident that India is on a sustained growth path. Consumption and investment
demand, the two main drivers of growth, are growing in tandem. Government
expenditure of the centre and the states is likely to pick up pace in line with the Budget
Estimates in the remaining quarters of the year. Strong balance sheets of banks and
corporates have created congenial conditions to further support private capex.
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Corporate profits (net) have grown by 14.2 per cent in Q1:2024-25. Government capex
continues to be strong. Overall, the Reserve Bank's projection of GDP growth at 7.2 per
cent for 2024-25 does not appear out of place.
As regards growth prospects in the medium to long-term, it is felt that the Indian
economy is on the cusp of transformational shifts. The fact that growth is on a rising
trend, despite modest global growth and continuing global challenges, shows that
structural drivers are playing a bigger role in India's macroeconomic outcomes. These
drivers include: policy push on creating robust physical infrastructure; our fast growing
digital public infrastructure; innovation and technological advancements across sectors;
and critical reforms in key areas.
To realise the aspiration of transitioning from an emerging to an advanced economy by
2047, the Indian economy would need a multi-pronged and a multi-sectoral approach .
Our focus should be on employing all engines of growth from both supply and demand
sides. The supply side focus must encompass agriculture, industry and services. We
should be mindful of the fact that agriculture possesses huge potential in India.
Agricommercial activities in horticulture, edible oils, dairy, poultry, food processing, etc.
could be the focus areas. Our approach should be to enhance productivity as well as
quality of our produce so that we gain a significant share in world exports, while
meeting our domestic requirements.
The potential contribution of manufacturing will be pivotal to generate additional
employment. Initiatives such as 'Make in India', 'Start up India', 'One District One
Product (ODOP)' and 'Production Linked Incentive (PLI)' scheme, among others, are
helping the manufacturing sector gain competitiveness and grow faster. The MSME
sector, in particular, holds a lot of promise to step up growth and employment
opportunities. Overall, the manufacturing sector must take the lead in niche areas to
compete globally.
The services sector, which has remained the mainstay of growth over the last several
decades, must explore new vistas of opportunities with focus on higher value-added
services. In addition, requisite focus on research and development (R&D) is also vital
for productivity and competitiveness. Together with government initiatives, including
higher fund allocations for R&D, the private sector may also be an active partner in this
field.
As I stated earlier, key demand drivers like consumption, investment and exports of
goods and services will have to move in tandem. Higher domestic consumption would
help insulate the economy from the vagaries of external uncertainties. Investment
remains critical for sustainable growth of the economy and, given the current
confluence of favourable factors, it is time for the private corporate sector to come
forward in a big way. The potential of external demand can be utilised to our advantage
by getting integrated into the global supply chains.
A holistic approach to nurture and accelerate a broad-based growth of the economy
would also necessitate preservation of the gains of past reforms and accelerating
India's reform journey with more reforms. From an economic perspective, reforms that
have imparted paradigm shifts and buttressed our stability and growth story would
include: (i) shifting from administered exchange rate of the rupee to a market
determined regime; (ii) stoppage of automatic monetisation of budget deficit financing
by the Reserve Bank; (iii) enactment of the FRBM Act; (iv) introduction of the flexible
inflation targeting framework; (v) enactment of the Insolvency and Bankruptcy Code
(IBC); and (vi) implementation of the Goods and Services Tax (GST). Each of these six
reforms have yielded long term positive outcomes. These reforms need to be
augmented by reforms in land, labour and agricultural markets. While we have made
some progress in these areas, lot more needs to be done both at the national and
subnational levels. Improvements in ease of doing business, especially at local levels, will
boost our competitiveness.
II. Inflation and Monetary Policy
In early 2022, the flare up in food, commodity and energy prices, following the outbreak
of the war in Ukraine, led to a sharp increase in inflationary pressures. This was further
compounded by a series of adverse domestic weather shocks. The decisive steps
taken by the Reserve Bank, supply side measures from the government and cooling of
international commodity prices have led to downward shift in inflation from early
202324. Nevertheless, the pace of disinflation is frequently interrupted by volatile and
elevated food inflation. It is the headline inflation that matters. It is the headline inflation
with food inflation having a weight of 46 per cent that the people understand. With the
monsoon progressing well and the healthy kharif sowing raising prospects of better
harvest, there is greater optimism that food inflation outlook could become more
favourable over the course of the year.
We have to remain watchful of how the forces impacting inflation play out. The balance
between inflation and growth is well-poised. We must successfully navigate the last mile
of disinflation, and preserve the credibility of the flexible inflation targeting (FIT)
framework which is a major structural reform. The best contribution that monetary policy
can make for sustainable growth is to maintain price stability.
III. Financial Sector - Strengthening the Foundations for Future
India's financial sector has repeatedly demonstrated its ability to overcome challenges
and crises. The financial sector showed remarkable resilience during and in the
aftermath of the COVID-19 pandemic. Today, all key indicators of the financial sector
4
demonstrate its robust health . This resilience, combined with other forces, can act as
critical driving forces for India's future.
In this milieu, the financial sector needs to even further deepen financial inclusion,
broaden access to credit and other financial products, and support overall inclusive
growth. It also needs to drive innovation in digital banking, foster sustainable finance,
and build a robust financial ecosystem that can withstand emerging challenges and
facilitate a higher trajectory of growth.
With the financial sector now in a strong position, it is our collective responsibility to
safeguard this stability, especially in an environment of heightened global uncertainty.
Financial institutions must continuously assess and refine their business models,
recognise and deal with the emerging risks, and remain focused on capitalising on
every new opportunity.
This brings me to the important issue of inclusive growth. While traditional metrics of
economic growth like GDP and per capita GDP are important indicators of progress,
they alone do not capture the full picture of what it means for a nation to be truly
developed.
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India has made remarkable progress in extricating people out of poverty. A truly
developed India must ensure that every citizen, regardless of their socio-economic
status, has access to financial services and has the required financial literacy. By
expanding access to banking, credit and insurance, and by harnessing the power of
digital platforms, the financial sector can drive inclusive growth that extends to the most
marginalised sections.
The Priority Sector Lending (PSL) programme remains crucial in addressing credit gaps
for underserved segments. Introduction of Business Correspondents (BCs) has further
enhanced financial outreach. The Financial Inclusion Index, introduced by the Reserve
Bank, has improved from 53.9 in 2021 to 64.2, reflecting the strides made in providing
access to financial services. There is, however, still more to be done to improve the
usage and quality of these services.
Two more key drivers need to be prioritised: enhancing financial literacy and leveraging
technology. The Reserve Bank has engaged in both self-driven and collaborative
approaches to promote financial literacy. We run multimedia public awareness
campaigns and outreach programmes as well as targeted financial literacy awareness
programmes. Collaborating with other financial regulators, the Reserve Bank has
assisted in establishment of the National Centre for Financial Education (NCFE) to
bolster financial literacy efforts. With the support of banks and NGOs, 2,421 Centres for
Financial Literacy have also been set up, covering almost all the blocks in the country.
On the technology front, the Reserve Bank has taken a number of initiatives to facilitate
development of digital public infrastructure and innovation. The Unified Payments
Interface (UPI) has revolutionised the digital payments space. Other initiatives like the
Regulatory Sandbox and the Innovation Hub, have fostered a robust environment for
enriching our fintech ecosystem. The commencement of the Reserve Bank's pilot
project for frictionless credit, i.e. the end-to-end digital platform of the Unified Lending
Interface (ULI) is expected to revolutionise access to credit, especially for farmers and
MSMEs.
IV. Expectations from the Financial Sector
Having spoken about safeguarding financial stability and financial inclusion, I would
now like to highlight some specific areas where I believe the financial sector can
contribute to India's growth aspirations.
(a) Improving female labour participation
India's female labour force participation remains lower than the global average. This
gap underscores the urgent need for targeted initiatives such as improving girls'
education, skill development, workplace safety, and addressing societal barriers.
Entrepreneurship is a vital component of economic empowerment; yet in India, less
than one fifth of MSMEs are owned by women. Women entrepreneurs often face
significant challenges including limited access to capital, restrictive societal norms, and
difficulties in accessing affordable finance. The financial sector has a crucial role to play
in bridging this gender gap by implementing supportive policies, creating tailored
financial products, and leveraging fintech innovations to offer better access to finance.
This can be pursued on two fronts - one, by providing higher employment opportunities
to women in financial institutions; and two, by supporting women entrepreneurs,
through Government sponsored schemes as well as banks' own schemes tailored to
suit businesses promoted by women. Banks could also actively explore onboarding
larger number of women BCs i.e. 'bank saathis' or 'sakhis', especially from among SHG
members.
(b) Supporting MSMEs
With our large young population, we need to fully tap the potential of MSMEs to drive
employment and economic development. Despite their importance, many MSMEs
remain small-sized and unable to scale up effectively due to various challenges, with
access to affordable finance being one of the barriers.
The financial sector may play an active role in supporting MSMEs. Banks and financial
institutions may develop tailored financial products and services that cater specifically to
the needs of MSMEs. This includes offering flexible credit options, improving access to
working capital, and providing financial support that accommodates the unique cash
flow cycles and growth stages of MSMEs. This can propel MSMEs to expand, enhance
their productivity, and contribute more significantly to job creation.
Conclusion
Let me now conclude. The Indian economy is forging ahead with macroeconomic and
financial stability, and a favourable growth-inflation balance. The policy mix pursued in
the recent years has strengthened the underlying fundamentals of the economy and
augmented the buffers. Consumption, which had been our main driver of growth, has
picked up pace, with recovery in rural demand. Investors' confidence is at an all-time
high; banks and corporates demonstrate robust balance sheets; and structural reforms
are playing a big role in pushing forward our growth frontier.
We are living in a dynamic and uncertain world, and we need to remain vigilant and
continue to build stronger buffers. New opportunities are knocking at our doors and
when I look at the entrepreneurial zeal and the talent of our younger population, it
makes me more confident of India's long-term growth prospects.
Thank you. Namaskar.
1
After growing by 9.9 per cent during 2023-24, construction activity continued to grow
at a rapid pace of 10.5 per cent in Q1 of 2024-25.
2
Sectoral Deployment of Bank Credit- July 2024 (data released by RBI on August 30,
2024)
3
Net profits of 2,934 listed private non-financial corporates grew by 14.2 per cent in
Q1: 2024-25 as against 6.4 per cent in Q4:2023-24. (Performance of Private Corporate
Business Sector during Q1:2024-25, released by RBI on August 30, 2024 )
4
GNPA ratio of banks was 2.7 per cent at end-June 2024, the lowest since end-March
2011. The annualised slippage ratio, which measures new NPA accretions as a
percentage of standard advances, continued to decline to reach at 1.3 per cent at
endJune 2024. The provision coverage ratio (PCR) continued to improve to reach at 76.5
per cent by end-June 2024. Capital to risk-weighted assets ratio (CRAR) stood at 16.8
per cent at end-June 2024, much above the regulatory threshold. The annualized
profitability indicators, namely, return on assets (RoA) and return on equity (RoE) stood
at 1.4 per cent and 14.2 per cent, respectively, at end-June 2024, showing continued
improvement.
5
As per a discussion paper on Multidimensional Poverty in India released by the Niti
Aayog, Multidimensional poverty in India was found to decline from 29.17 per cent in
2013-14 to 11.28 per cent in 2022-23 with about 24.82 crore people escaping poverty
during this period. Mutlidimensional Poverty in India since 2005-06 - A Discussion Paper
By Prof. Ramesh Chand and Dr. Yogesh Suri, Niti Aayog, January 2024.