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Economy 12-May, 2024

RBI's 8-10% Growth Mandate in the Face of Inflation

By: Manya Upreti

RBI's 8-10% Growth Mandate in the Face of Inflation

SOURCE: Unsplash

According to the RBI, India needs to target a growth rate of 8–10% per year over the next ten years in order to achieve its developmental goals over the next thirty years.

The Reserve Bank of India (RBI) has underscored the imperative for India to sustain an annual economic growth rate of 8-10% over the next decade to fully leverage its demographic dividend. 

The RBI's last bulletin, "State of the Economy," emphasizes the necessity of strong growth to take advantage of India's edge in terms of population since 2018. But among these hopes for prosperity, worries over India's inflation have become a crucial factor.

According to the RBI bulletin, conditions are aligning favorably for India to achieve a sustained increase in real GDP growth, which has averaged over 8% between 2021 and 2024. The bulletin highlights that India needs to target a growth rate of 8–10% per year over the next ten years in order to achieve its developmental goals over the next thirty years. According to RBI calculations, this development trajectory is necessary to capitalize on the demographic dividend that started in 2018 and is expected to extend until 2055.

While the RBI advocates for ambitious growth targets, concerns about inflation in India loom large. A gradual increase in inflationary pressures is evident in recent data, and it can be attributed to a number of variables such as supply chain interruptions, rising commodity prices, and higher government spending. In addition to making it difficult to keep prices stable, inflationary forces also run the risk of reducing customers' purchasing power, especially for those in lower income brackets. Inflation in India has witnessed an uptick in recent months, with headline inflation surpassing the RBI's target range of 2-6%. This puts policymakers in a difficult position as they work to strike a balance between encouraging economic growth and reducing inflationary pressures. This fine balance between promoting growth and controlling inflation will be largely determined by the RBI's monetary policy actions, which will include managing liquidity and interest rates.

Addressing inflation concerns requires a multi-faceted approach, encompassing both monetary and fiscal measures. The International Monetary Fund (IMF) noted that inflation was already at or near the target and that developing countries would fare better. Regarding headline inflation, it was stated that while food price pressures, particularly for rice, may slow headline disinflation in some economies (like India), reduced energy prices may cause faster declines in headline inflation in others.

Based on figures provided, India's inflation fell to 4.9% in March 2024, a 10-month low. But food inflation stayed stubbornly high at above 8%. The IMF maintained its 4.6% prediction for FY25, which would drop to 4.2% in FY26. For the current fiscal year, the Reserve Bank of India projects inflation to drop to 4.5%.

Maintaining a strong economic development trajectory is critical as India works to fully realize the benefits of its demographic dividend. India can achieve equitable and sustainable growth by implementing a comprehensive strategy that includes monetary, fiscal, and structural reforms. This would guarantee that the demographic dividend is translated into real socioeconomic benefits for the country.

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