UPSC Editorial Analysis

Challenges and Opportunities with India’s Economic Trajectory

GS Paper 3 - Indian Economy, Planning, Agriculture


In the back of India’s sustained economic growth of above 7% for three consecutive years, there is need for a thorough analysis of the Indian Economy over the past five years until 2018-19, the economy witnessed substantial real GDP growth, however, the subsequent five years until 2023-24 saw a significant slowdown due to pandemic-induced disruptions, this should serve as a pivotal starting point for the incoming government’s policy agenda.

Current State of Indian Economy

  • Robust Growth – Over the last decade, India’s economy has grown robustly and resiliently, propelling it from tenth to fifth biggest in the world and establishing it as the fastest-growing economy among G20 nations. The International Monetary Fund (IMF) expects India’s GDP to rise by 6.8% in fiscal year 2024/25 and 6.5% in fiscal year 2025/26.
  • Current Account Deficit – According to the Economic Survey 2024, India’s current account deficit has been dramatically reduced to 1% of GDP in the first half of FY24, thanks to strong service exports and lower oil import prices. 
  • Foreign Investment – Robust foreign institutional investor (FII) inflows have increased currency reserves to over $643 billion. FII inflows reached at $41 billion in 2023-24, compared to net outflows of $5.5 billion the previous year. 
  • Manufacturing Sector – Manufacturing sector capacity utilization is at 74%, close to the long-term average, and there are signals of a potential acceleration in the private capital expenditure cycle in the coming quarters. 
  • Inflation – Consumer Price Index (CPI) inflation has slipped below the Reserve Bank of India’s upper goal range of 6%, but core inflation has stayed around 4% in April 2024, owing to disinflation in the services sector. 
  • Decline Urban Employment – In 2023-24, the economy is expected to grow by 7.3%, up from 9.1% in FY22 and 7.2% in FY23, while the urban unemployment rate fell to 6.6
  • Rural Demand – According to a Nielsen analysis, it is showing encouraging tendencies, with Fast Moving Consumer Goods (FMCG) volume growth in rural regions increasing from 2.2% to 6.2% in the second half of 2023.

Challenges faced by Indian Economy in last five years

  • Slowdown in Economic Growth – The COVID-19 epidemic caused a significant economic collapse in India in 2020, resulting in a negative growth rate. However, the economy saw a remarkable return in 2021, with a growth rate of about 9%, which has since stabilized at around 7%. 
  • Unemployment and Underemployment – The COVID-19 epidemic exacerbated the situation, as many enterprises shut down or decreased operations, resulting in employment losses. According to the Centre for Monitoring the Indian Economy (CMIE), nearly 1.8 crore paid jobs were lost between April and July 2020. 
  • Agriculture and Allied Sector – Despite the recent increase in India’s GDP, the agriculture sector has not seen comparable improvement. According to the Economic Survey 2022-23, India’s agricultural and allied industries have grown at an average annual rate of 4.6% over the last six years, although this falls short of the targeted rate for significant increases in farmer incomes. 
  • Slowing Household Consumption and Income Inequality – High levels of income disparity reduce consumer demand, particularly among the lowest income groups, which leads to weaker investment demand and, as a result, poor growth. India’s Gini coefficient, a measure of income inequality, was 0.38 in 2019-20, suggesting substantial income inequalities.
  • Infrastructure Deficit and Private Investment – The World Bank estimates India’s infrastructure shortfall to be over $1.5 trillion. Private investment continued to decline, reaching a low of 19.6% of GDP in 2020-21. India’s infrastructure deficit is anticipated to exceed $1.4 trillion, with significant areas of concern being transportation, electricity, and healthcare facilities.
  • Export Challenges – Geopolitical tensions, such as border disputes and trade conflicts like Russia-Ukraine war, can disrupt global trade patterns. Furthermore, India’s ambition to become a key force in the global pharmaceutical business has challenges; despite its objectives, India’s growth has failed to keep pace with demand, lagging behind at 9 percent, when the worldwide market rose by 12 percent over the last four years.

Potential Focus Areas of Indian Economy

  • Creating Employment – Employment creation, mostly driven by the private sector, needs a favorable climate. While the government can partially fill empty posts, long-term employment creation is dependent on consumption-led development. 
  • Reviving Private Investment – While the government has taken a proactive approach to capital investment, particularly in infrastructure development, private sector engagement is critical. Although investments in areas like roads and railroads have fueled growth, private enterprises, motivated by profit, require favorable conditions.
  • Agricultural Reforms – Addressing the agriculture sector’s issues, particularly in light of disputed farm legislation, is critical. Farmers can benefit from government involvement in farming through state cooperatives, as well as clarification of agricultural trade rules.
  • Boosting Household Consumption – Household consumption, albeit unpredictable, has shown indications of recovery following the epidemic. However, consumer goods demand remains low, owing to excess capacity and increasing inflation. Fiscal measures, such as revising tax rates and rationalizing GST slabs, are critical for stimulating consumption.

Way Forward

India’s economy has demonstrated resilience and adaptability, overcoming challenges and capitalizing on opportunities. The path ahead calls for strategic policy interventions that prioritize sustainable growth, equitable development, and robust employment generation. As the nation navigates through post-pandemic recovery, it is imperative to bolster sectors like agriculture, manufacturing, and services while addressing the pressing issues of infrastructure, private investment, and consumption. The upcoming years will be pivotal in shaping India’s economic trajectory, demanding a collaborative effort from all stakeholders to ensure prosperity and progress for the largest democracy in the world.

SOURCE: The Indian Express|

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