Context: The Reserve Bank of India has downgraded India’s GDP growth forecast for FY2024-25 from 7.2% to 6.6%. While the government maintains that the slowing of Q2 growth is a “temporary blip”, it raises some concerns about India’s economic growth trajectory.
Relevance of the Topic: Mains: Key trends in India’s Economic Growth- Slowdown, Positives, Challenges, Investment-led growth, etc.
Present Situation in India’s Economic Growth
- India’s GDP growth slowed significantly in 2024 dropping to 5.4% in Q2 of FY24-25.
- There was a dip in economic output in the first three quarters of 2024.
- RBI downgraded FY 2024-25 GDP growth forecast from 7.2% to 6.6%.
- India’s long-term growth rate is projected at 6.5% over the next half decade.
- Comparison with Asian economies: China, Japan, and South Korea grew at 8%-plus on a sustained basis during their rapid-growth phases.
Positives Aspects of Economic Outlook
- Increased Fiscal spending: Post-election season, the government spending is witnessing a rise.
- Decrease in CRR requirement: Recent cut in cash reserve ratio (CRR) has freed up money kept by banks with the RBI.
- Boosting Capital formation: The capex cycle has restarted in some sectors, and this indicates return to investment-led growth.
- Growth in services: India’s services exports to developed markets hit a new high in October 2024.
- Supporting factors: Disaggregation of global services value-chains, rapid increase in global cross-border telecom bandwidth, surge in remote-working, etc.
- Potential MSME recovery: An MSME rebound could narrow the two branches of the K-shaped recovery.
- Consumption recovery in rural areas and an improvement in salaried employment reported in the Periodic Labour Force Survey reflect increasing non-casual jobs with MSMEs.
- Increase in female labour force participation particularly in rural areas.
- Around 39.6% of women with higher educational level (post-graduate and above) were reported as working in FY24, compared to 34.5% in FY18.
- For women with higher secondary education level, these numbers were 23.9% and 11.4%.
Concerns Remaining
- Issue of Jobless growth: Adequacy of 6%-plus growth to generate 8 million jobs annually until 2030 is unclear.
- Slowing down of Corporate growth: partly due to sliding consumption growth.
- Sluggish Investments: due to softening urban demands and high food inflation.
- Inequality in growth: Current growth trends reflect expanding wealth disparities and little scope for generational mobility.
- Challenge in Service sector growth: India’s IT exports appear vulnerable to new technologies such as AI.
- Sliding credit growth: Growth in credit has been falling — for both households, as well as industry.
- Rising NPAs:
- There is a significant rise in NPAs in the personal loan and credit card segments.
- Both these types of credit are unsecured and carry high interest rates.
- Savings-Investment Gap:
- RBI’s latest Financial Stability Report shows Net financial savings of households fell to 5.3% of GDP in FY23 from 7.3% in FY22.
- Rising household debt, especially in loans, poses risks to future savings and economic stability.
- Complex Tax laws: India’s tax laws and its administration is the single biggest hurdle in fostering a conducive investment environment.
- Lack of reforms: The appetite for implementing even pending Labour reforms appears diminished.
- State-level Fiscal Challenges:
- Increased fiscal spending by states, especially in subsidies and welfare schemes, raises fiscal discipline concerns.
- Programs like farm loan waivers and cash transfers, while beneficial, contribute to rising food inflation.
India’s economic future remains promising despite challenges. The need of the hour is to address structural weaknesses in the economy, boost private investment, and improve fiscal discipline to ensure continued economic growth.