By Nantoo Banerjee
The net economic growth of India, adjusted for inflation, is projected to fall short of expectations set by the government, the Reserve Bank, and international organizations like the International Monetary Fund (IMF), the Asian Development Bank (ADB), and the World Bank. Current forecasts suggest a net growth rate of approximately 5.8 percent for the fiscal year 2024-25. Conversely, the Ministry of Statistics has released preliminary estimates indicating a GDP growth rate of 6.4 percent for this fiscal year, significantly lower than the 8.2 percent growth recorded for the previous fiscal year, 2023-24.
Recently, the ADB revised India’s growth outlook downward from seven percent to 6.5 percent, and from 7.2 percent to seven percent for the following year, citing weaker-than-anticipated growth in private investment and housing demand. Last September, the World Bank had optimistic projections for a seven percent GDP growth for the current fiscal year, maintaining that India would retain its status as the fastest-growing major economy globally. The World Bank attributed this outlook to strong agricultural production and effective government employment policies stimulating robust private consumption. However, recent trends show that employment growth and private consumption rates have not met these initial expectations.
Furthermore, the Reserve Bank has lowered its growth projections for the current fiscal from 7.2 percent to 6.6 percent while adjusting the inflation forecast to 4.8 percent due to a slowdown in economic activities and persistent food inflation. The GDP growth for the July-September quarter has dropped to a seven-quarter low of 5.4 percent, which is below the RBI’s own projection of 7 percent. In a surprising turn, the IMF has revised India’s GDP growth forecast upward by 20 basis points to seven percent for FY 24-25, increasing its previous April estimate of 6.8 percent. The IMF’s ‘World Economic Outlook’ indicates that India’s economic growth forecast for the current fiscal year has also been adjusted to 7.0 percent, attributed to a notable increase in consumption, particularly in rural areas. As a result, India remains the fastest-growing economy among emerging markets and developing countries.
Yet, many of these projections do not adequately factor in inflation rates. Although India’s economic growth rate, adjusted for inflation, appears robust compared to developed nations, it clearly indicates a trend towards economic slowdown within the country. Various factors contribute to this situation. The middle-income group, representing the largest consumer base, is facing financial strains to meet their daily needs. High goods and services tax (GST) and income tax rates have become burdensome, coupled with stagnating income and job growth. Escalating healthcare costs, including increased medicine prices, also raise concerns. Private investment has been sluggish for years, and government spending—a crucial economic driver—has been curtailed. India’s goods exports have long struggled, holding only a two percent share in the global market in 2023, while soaring imports are eroding local jobs. Meanwhile, the affluent are converting surplus rupees into gold, which has surged to record levels since the government reduced import duties last year.
The manufacturing and mining sectors are significantly dragging down India’s economic growth this year. Both sectors have experienced a growth slowdown due to rising imports. For the first time in several years, the construction sector is also showing signs of slower growth. The hospitality sector, along with travel and general trade, is also falling short of expected growth levels this year. Particularly, the manufacturing sector is projected to face the most profound decline, with growth anticipated to drop to 5.3 percent from 9.9 percent in the previous year.
Similarly, the mining industry is expected to slow considerably, with growth estimated at 2.9 percent, down from 7.1 percent last year. Imports are increasing unchecked, while exports are under constant pressure from fluctuations in international markets as most countries seek a favorable trade balance. Insufficient investments in critical sectors also hinder growth, and indicators like the Index of Industrial Production (IIP) signal a slowdown across various industries. All these factors collectively contribute to an overall dip in India’s GDP growth for the current fiscal year.
In the face of these dismal economic growth forecasts, India’s agricultural sector emerges as a beacon of hope. Despite various challenges, the sector is anticipated to show positive growth, potentially counterbalancing some of the declines in other areas. According to projections from the National Statistical Office (NSO), India’s agricultural sector is expected to grow at 3.8 percent in 2024-25, a significant increase from last year’s growth of 1.4 percent. This optimistic outlook is attributed to a favorable monsoon season, which is expected to boost foodgrain production and contribute to a projected 6.4 percent GDP growth for the broader Indian economy during the current fiscal year.
Looking ahead to the 2025-26 financial year, there is a strong emphasis on the upcoming budget to alleviate obstacles hindering higher economic growth moving forward. Much will rely on the government’s capacity to enhance and expedite infrastructure investment, promote private sector initiatives, and support green initiatives. It is vital that the forthcoming national budget genuinely pursues tax reforms aimed at stimulating consumption and economic growth, focusing on critical areas such as manufacturing, mining, and import regulations. The budget should also prioritize rural development, skill enhancement, and job creation through incentives for new businesses and support for emerging sectors like AI and renewable energy. Lastly, budgetary measures, combined with coordinated efforts from the government and the RBI, should aim to stabilize the rupee to bolster confidence among direct industrial investors—both foreign and domestic—in the country. (IPA)
