In 2025, where growth will come from

India is facing a slowdown in growth, with GDP growth figures showing a significant decline. From a growth rate of over 8% in mid-2023, India’s growth has dropped below 5.5% by the September 2024 quarter. While some see it as a temporary issue, others fear a more persistent trend, especially since consumption demand is subdued and private investment remains weak. However, experts suggest that India still has an opportunity to boost growth by focusing on increasing its export share, particularly in manufacturing.

Growth Slowdown and Economic Risks

• Declining Growth Rates: Official data shows that India’s growth has fallen in four out of the last five quarters, signaling a persistent slowdown. High-frequency indicators confirm that the drop in growth is not merely a temporary blip but a potential trend.
• Weak Consumption and Investment: There is subdued consumption demand, especially in urban India, while private investment remains low despite healthy corporate balance sheets. This lack of demand is compounded by government investment running into fiscal constraints.
• The Risk of Stagnation: If the current trend continues, India could face prolonged slow growth. As a poor country, such slowdowns are more painful than they would be for wealthier nations. India requires sustained rapid growth to achieve developed country status.

Export-Led Growth Strategy

• Export Opportunity for Growth: India’s share in global goods exports is much smaller than its share in global GDP, highlighting a major opportunity to increase export volumes. If India raises its export share by just 1 percentage point in the next five years, it could lead to a 50% increase in export volumes and add 1 percentage point to GDP growth annually.
• Attracting FDI in Manufacturing: There is a historic opportunity for India to attract Foreign Direct Investment (FDI) as multinational companies look to move out of China. India’s large population and strong growth prospects make it an attractive alternative for manufacturing, which could drive export growth.
• Unmet Potential in FDI and Exports: Despite efforts like the Production Linked Incentives (PLI) scheme, India has failed to tap into this opportunity. FDI in manufacturing remains low, and year-on-year growth in goods exports has been only 4.5%, suggesting a missed opportunity in increasing global export market share.

Policy Changes Needed for Growth

• Policy Certainty and Stability: To achieve export-led growth, India must ensure consistency in trade policies. This includes avoiding frequent changes in tariffs, bans, or protectionist measures that create uncertainty for investors.
• Re-liberalizing Trade and Exchange Rate Adjustments: A re-liberalization of India’s foreign trade regime is necessary. Additionally, exchange rates should be allowed to respond to market forces to enhance the competitiveness of Indian exports.
• Fostering Investment Confidence: A predictable policy environment is crucial for attracting both foreign and domestic investment. Long-term investments require macroeconomic stability and assurance of policy continuity to create confidence among investors.

Practice Question:

Q. India has a historic opportunity to boost its economic growth through an export-led strategy. Critically analyze the policy changes required to tap into this opportunity and the challenges India faces in achieving sustained economic growth.