Domestic growth, global risks
(Source – Indian Express, Section – The Ideas Page – Page No. – 15)
Topic : GS3 – Indian Economy
Context
India’s economic growth is moderating amid global uncertainties, requiring strategic investments, policy reforms, and a balanced fiscal approach to sustain momentum.
India’s GDP Growth: Slower than Expected
- India’s first advance growth estimate for the current fiscal year stands at 6.4%, falling short of the Economic Survey’s projection of 6.5-7%.
- This growth rate is slightly slower than the pre-pandemic decadal average of 6.6%.
- Additionally, nominal GDP, which incorporates the effects of inflation, expanded by 9.7%, lagging behind the budget’s estimate of 10.5%.
- These figures indicate a moderated economic pace compared to the previous year when India’s GDP growth exceeded expectations.
Global Economic Uncertainties and Risks
- The global economic outlook remains uncertain, with major economies displaying divergent growth trajectories.
- The US is projected to grow near its long-term trend rate of 2% in 2025 following a strong 2024.
- China’s economy continues to decelerate, while Europe remains below its trend growth despite slight improvements.
- Additionally, geopolitical risks are evolving, with former US President Donald Trump hinting at the possibility of imposing tariffs.
- Given India’s trade surplus with the US, these developments will be closely monitored.
- The Economic Survey factors in these uncertainties and projects India’s real GDP growth for the next fiscal year to range between 6.3% and 6.8%, aligning closely with Crisil’s estimate of 6.7%.
Multilateral Growth Projections and India’s Standing
- Global financial institutions have begun revising their growth expectations downward.
- The International Monetary Fund (IMF) forecasts India’s GDP growth at 6.5% for both this fiscal year and the next, while the World Bank projects 6.7% for the upcoming year.
- Despite this moderation, India remains the fastest-growing major economy.
- This sustained growth, however, will require a strong push from domestic investments and policy support to maintain momentum.
Investment Landscape: Public vs. Private Investment
- The post-pandemic recovery has been largely driven by public and household investments, whereas private corporate investments have yet to exhibit sustained growth.
- It is imperative for the private sector to take over from the government as the primary driver of capital expenditure.
- The Economic Survey highlights that India is competing for investments not only with emerging economies but also with developed nations that are striving to retain businesses domestically.
- To ensure continued investment inflows, India must focus on deregulation and structural reforms that can unlock its domestic growth potential over the medium term.
Capital Expenditure and Fiscal Policy
- The current fiscal year’s budget had anticipated a slowdown in capital expenditure (capex) growth to 17.1%, down from 28.2% in 2023-24, reflecting a normalization of government-led spending.
- Despite being projected to outpace nominal GDP growth, the capex target may not be met due to sluggish spending by both central and state governments.
- Beyond increasing allocations, efficiency improvements in project execution are critical.
- As of November 2024, nearly 40% of central sector projects (costing ₹150 crore or more) were delayed and over-budget.
- Ensuring shovel-ready projects and enhancing coordination with states will help maximize returns on infrastructure investments.
Need for a Predictable Tariff Regime
- A long-term tariff policy for raw materials, intermediates, and final products is essential for creating a stable business environment.
- Predictable tariffs will bolster investment sentiment, particularly in manufacturing—a sector that India aims to leverage as a key growth driver.
- By establishing a clear tariff structure, the country can attract greater foreign and domestic investment in industrial production.
Inflation and Monetary Policy Constraints
- The Economic Survey anticipates a decline in headline consumer inflation, led by easing food prices.
- Crisil’s forecast of an average 4.4% retail inflation for the next fiscal year aligns with this assumption, provided there are no major weather disruptions and crude oil prices remain around $75 per barrel.
- However, food inflation remains sticky, with December 2024 figures at 8.4%, keeping overall inflation high and delaying potential interest rate cuts.
- Given that non-food inflation was comparatively low at 3.1%, managing agricultural price volatility will be key to easing inflationary pressures.
Strengthening Agricultural Resilience
- Although weather conditions are beyond human control, agricultural resilience can be enhanced through investments in food processing, climate-resilient crop varieties, and cold-chain logistics.
- These measures will help reduce food wastage and stabilize prices, mitigating the impact of inflationary shocks.
- Strengthening the agricultural supply chain will be crucial for ensuring food security and price stability in the long run.
Energy Transition and Industrial Growth
- The Economic Survey advocates a calibrated approach to energy transition, balancing economic growth, energy security, and sustainability.
- India’s growth engines—industry and infrastructure—are more carbon-intensive than the services sector, making this transition particularly challenging.
- Technological advancements, such as declining solar module prices, have accelerated renewable energy adoption.
- However, India remains dependent on imports for critical components like polysilicon, ingots, and wafers.
- A strategic policy framework is needed to boost domestic manufacturing in the renewable energy sector and reduce reliance on external suppliers.
Reforms to Enhance Business Competitiveness
- Further reforms are needed to improve India’s ease of doing business, particularly in areas such as labor laws, land acquisition, tax regulations, and dispute resolution.
- The government has made strides in improving logistics through initiatives like the Prime Minister Gati Shakti plan.
- A similar coordinated approach can be applied to business reforms, ensuring a more seamless investment climate.
- Addressing regulatory bottlenecks will help unlock India’s economic potential and attract higher levels of private investment.
Fiscal Consolidation Strategy
- A measured approach to fiscal consolidation is crucial, especially as high nominal GDP growth-driven fiscal gains begin to diminish.
- Between 2022 and 2024, nominal GDP growth averaged 14.2%, aiding faster fiscal consolidation.
- However, this fiscal year’s nominal GDP growth of 9.7% is lower than budget projections.
- While India is likely to meet or exceed its fiscal targets due to lower-than-budgeted capital expenditure, the government may need to recalibrate its fiscal deficit reduction path next year.
- Given multiple economic uncertainties, maintaining fiscal flexibility while supporting economic growth will be essential.
Challenges for Sustained Growth
Key engines of GDP showing sluggish growth.
- Private consumption: Slow CAGR of 4.8% since FY20 hinders growth.
- Government spending: Limited fiscal expansion since 2019 (CAGR of 3.1%).
- Investments: Stagnation in private and public sector capex since 2014 (CAGR of 5.3%).
- Net exports: Persistent trade deficit, although narrowing in FY25.