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Critical Topics and Their Significance for the UPSC CSE Examination on December 30, 2024

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Why inflation will matter more in 2025?

For Preliminary Examination: Consumer Price Index (CPI), Wholesale Price Index (WPI), Inflation

For Mains Examination: GS III - Economy

Context:

It has been what one may call, a bittersweet year for the economy, with a sweet first half, when growth surprised everyone, including the government. And a difficult latter half by the end of which the Reserve Bank of India (RBI) and Finance Ministry mandarins are sparring, as diplomatically as possible, over who is to be blamed for sputtering growth, a persistently resurgent inflation trajectory and the flux this creates for policy making

Read about:

Wholesale Price Index (WPI)

Consumer Price Index (CPI)

Key takeaways:

• Since late November, senior government officials have been vocal about the need for the RBI to reduce interest rates, emphasizing growth and investment over volatile food prices. This urgency became evident after Q2 GDP figures revealed a 7-quarter low growth rate of 5.4%, accompanied by weakened urban demand and lackluster corporate earnings that affected market sentiment.
• Despite these challenges, India's stock markets hit record highs, and GDP for the first half of 2023-24 rose to 7.7%, up from 7.2% in the previous year.
• The Finance Ministry anticipated full-year growth exceeding 6.5% while preparing an interim Budget ahead of the general elections. The RBI was expected to initiate rate cuts in late 2024, projecting inflation to average its target of 4% by July-September.
• The NSO's growth estimates for 2023-24 exceeded expectations, bolstered by revised earlier data. The first half grew by 8.1%, with an 8.6% surge in Q3 (October-December 2023) and 7.8% in Q1 2024, culminating in an impressive 8.2% annual growth.
• However, the 2024-25 Q1 period was dominated by election activities, during which the BJP secured 240 seats in the Lok Sabha, allowing the NDA to retain power with support from allies. Key economic portfolios saw continuity in leadership.
• In July, Finance Minister Nirmala Sitharaman presented the Union Budget for 2024-25, focusing on employment, the middle class, skilling, and job creation. Modest tax reliefs aimed to mitigate inflation's impact and boost consumption.
• While private investment recovery depended on sustained consumption, public infrastructure spending remained crucial, with a capex plan of ₹11.11 lakh crore announced. The government remained optimistic about achieving a fourth consecutive year of 7%+ growth.
• Initial growth data for 2024-25 showed a five-quarter low GDP increase of 6.7%, attributed to delays in capital spending during the prolonged election period. While optimism persisted, concerns about high interest rates dampening urban demand emerged.
• By September, S&P Global Ratings forecast 6.8% growth for the year, below the RBI's 7.2% projection. Following a disappointing Q2, various entities, including the Finance Ministry, revised growth projections to around 6.5%, raising fears of a cyclical slowdown.
• Although inflation stayed below 6% for most of the year, it reached a five-year low of 3.5% in July before rebounding due to rising food prices in September, pushing headline inflation closer to 6%.
• Consequently, the RBI refrained from cutting rates in October or later, citing persistent inflation risks. Its 2024-25 growth projection was reduced to 6.6% from 7.2%.
• High interest rates and inflation continued to strain consumption and investments, prompting tensions between the government and the RBI over economic priorities.

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