UPSC Editorial Analysis

India’s Economy Growth Outlook

[GS Paper 3 - Indian Economy, Growth and Development]


India’s economic development trajectory has attracted worldwide attention, with the respected ratings firm S&P worldwide revising its forecast from stable to positive. This move underlines the agency’s belief that policy stability, deeper economic reforms, and significant infrastructure investment will ensure India’s long-term growth prospects.

With public investment and consumer momentum serving as the primary drivers of near-term growth, tailored economic policies are necessary to shape India’s trajectory toward its goal of being the third biggest economy by 2027 and ensuring long-term economic growth.

India’s Recent Economic Growth Projections

  • IMF Projection (World Economic Outlook, April 2024) – The IMF increased India’s GDP growth prediction for fiscal year 2024-25 to 6.8%, up 0.3 percentage points from its January 2024 projection. The IMF expects India’s GDP to expand by 6.5% in fiscal year 2025-26.
  • United Nations Projections (World Economic Situation and Prospects, Mid-2024)- India’s GDP is expected to increase at 6.9% in 2024 and 6.6% in 2025. The 6.9% growth prediction for 2024 is an increase over the previous 6.2% projection released in January 2024.
  • Reserve Bank of India (RBI) – The Reserve Bank of India anticipates India’s real GDP to increase by 7% in 2024-25. GDP growth is predicted to slow to 6.8% in the September 2024 quarter from 7.2% in June 2024.

Factors propelling India’s Economic Growth

  • Strong Domestic Demand – Private spending is increasing rapidly, driven by growing salaries and an expanding middle class. Private consumer expenditure increased by 3.5% year on year in the third quarter of FY 2024, according to Deloitte.
  • Robust Investment Activity – Private investment increased by 10.6% year on year in the third quarter of FY 2024, demonstrating a significant rebound in the private capital expenditure cycle. Initiatives such as the National Monetization Pipeline seek to unleash the value of Brownfield infrastructure assets and encourage private investment.
  • Moderating Inflation – Inflation has been on a downward trajectory, with retail inflation at 4.83% in April 2024. This provides a stable environment for businesses and consumers, encouraging spending and investment.
  • Manufacturing Resurgence – The manufacturing sector grew by 11.6% year-over-year in Q3 of FY 2024, driven by initiatives like the Make in India program and PLI schemes. The government’s push towards self-reliance (Aatmanirbhar Bharat) is boosting domestic manufacturing capabilities.
  • Services Sector Resilience – The services sector, which accounts for a sizable portion of India’s GDP, expanded by 7% year on year in the third quarter of fiscal year 2024. The IT and IT-enabled services sector continues to thrive, fueled by increased worldwide demand for digital solutions.
  • Resilience to Global Headwinds – Despite global economic concerns, geopolitical tensions (Russia-Ukraine War), supply chain disruptions (Red Sea Crisis), and tighter financial circumstances in key economies such as the United States, India’s domestic demand has remained reasonably stable.
  • Supply Chain Diversification – With global supply chain disruptions, India has emerged as an appealing alternative destination for industrial investments, notably in electronics and pharmaceuticals.

Challenges with India’s Economic Growth

  • Employment Challenges – Despite consistent GDP growth over the last decade, the government’s principal policy problem has been a lack of significant job creation (jobless growth). The unemployment rate in India was 8.1% in April 2024, according to CMIE’s Consumer Pyramids Household Survey.
  • Export Competitiveness Challenges – Despite legislative incentives, India’s exports fell 3% in FY24. The goods trade deficit rose at USD 19.1 billion in April 2024, up from USD 14.44 billion in April 2023.
  • Skill Mismatch and Labor Quality – India suffers from a skills mismatch between the available labor and industrial requirements, which impedes productivity and job development. According to a new survey, just 45% of Indian graduates who seek employment have the skills necessary to satisfy the industry’s fast changing needs.
  • Income Inequality – The disparity between affluent and poor in India remains vast. The Gini coefficient, which measures income inequality, stood at 0.4197 in 2022-23. India’s wealth disparity has reached a six-decade peak, with the top 1% controlling 40.1% of the wealth.
  • Informal Sector Dominance – The informal sector employs a sizable share of India’s workforce, which is characterized by poor salaries, limited social security benefits, and slow productivity growth. In terms of employment, the unorganized sector employs 83% of the workforce, compared to 17% in the organized sector (IMF).
  • Infrastructure bottlenecks – Despite recent efforts, India’s infrastructure deficit remains in electricity, transportation, and logistics. The NITI Aayog forecasts that India would need to invest USD 4.5 trillion on infrastructure by 2040 to maintain its development trajectory.

Measures to accelerate India’s Economic Growth

  • Expanding the Manufacturing Sector – In order to absorb the workforce shifting from agriculture, India must strengthen its manufacturing sector and create more jobs. This may be helped by offering targeted training programs and incentives for companies to employ and train agricultural workers, resulting in a smooth transition and increased overall production.
  • Gig Economy Skilling – Collaborate with online platforms such as Uber and Meesho to create micro-skilling programs tailored to the gig economy. This provides children with in-demand skills for instant employment chances.
  • Export Processing Zones (EPZs) 2.0 – Create modern EPZs with an emphasis on sustainability and technology. Offering tax benefits and simplified rules to entice green technology and high-value manufacturing firms. Providing financial incentives and training programs to prepare small and medium-sized firms (SMEs) for e-commerce exports.
  • Industrial-Academia Collaboration – Increasing collaboration between universities and industries to design curriculum that meets industrial demands. Introducing a system of micro-credentials and stacking certificates to identify particular talents. This enables individuals to constantly upskill and adapt to changing employment requirements.
  • Formalization Incentives – Offering tax breaks and easier access to credit for informal businesses that transition to the formal sector. This incentivizes formalization and increases tax revenue.

Way Forward

To ensure India’s robust economic growth trajectory and achieve its goal of becoming the third-largest economy by 2027, a multi-faceted approach is essential. Strategic policy formulation must prioritize skill development to address the labor quality gap and boost job creation in both the formal and informal sectors. Enhancing export competitiveness through modernized Export Processing Zones and leveraging the gig economy can provide immediate employment opportunities while fostering long-term growth. Investing in infrastructure and encouraging private investment through initiatives like the National Monetization Pipeline will be crucial. By addressing these key areas, India can sustain its growth momentum and ensure inclusive economic development.

SOURCE: The Indian Express


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