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This Remains India’s Decade as Its Economic Cycle Promises Growth
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Context
India’s economy has demonstrated consistent strength post-pandemic, with an optimistic outlook for future growth. Despite a coalition government at the Centre, policy continuity is expected, supporting India's trajectory towards becoming the world's third-largest economy by 2027.
Current Economic Growth Cycle
- Positive GDP Growth: India's GDP growth has consistently surpassed expectations over the past five quarters. High-frequency data reflects this robustness with manufacturing and services PMI readings near 14-year highs, credit growth at or above 15% for the past nine months, and GST collections above ?1.5 trillion for the past 15 months.
- Early-Stage Expansion: Despite concerns about sluggish consumption in low-income segments and slow private capex pick-up, indicators suggest this is symptomatic of an early-stage expansion. Data points to improving rural demand and an uptick in private investment.
- Broader-Based Growth: As the economic expansion continues, growth is expected to become more broad-based, with rural demand and private investment showing signs of recovery.
Transformation Through Policy Reforms
- Supply-Side Responsiveness: Policy reforms in the past decade have enhanced the economy’s supply-side responsiveness, contributing to a higher investment rate, systematically lower inflation, and a stronger external balance sheet. Capex has risen to around 34% of GDP in 2023-24 from a trough of 28% in 2020-21.
- Macro Stability: Inflation has been below 6% in seven of the past nine years, and the current account deficit has remained around or below 2% of GDP since 2013-14. India’s export market share has increased by 40 basis points to 2.5% since 2019.
- Global Integration: Improved integration with the global economy through policy measures has fortified India’s economic position, making the growth cycle more self-sustaining and less vulnerable to global shocks.
Future Policy Directions
- Job Creation: Focus on expanding infrastructure investment and boosting the manufacturing base is crucial for leveraging India’s demographic dividend. Since 2014, significant expansion in physical infrastructure, including a 1.5x increase in roads, doubling of airports, and electrification of railway routes, is expected to enhance domestic competitiveness and create non-farm jobs.
- Macro Stability: Policymakers are expected to maintain a framework favoring fiscal prudence, an efficient expenditure mix, and improvements in targeting welfare spending. The upcoming budget is likely to emphasize fiscal consolidation, job creation, and sustaining capex growth.
- Growth Strategy: To achieve 8-10% growth, decisive steps are needed to address factor markets (land and labor) and improve agricultural productivity. Maintaining a balanced policy mix is essential to ensure continued economic expansion.
Risks and Bottom-Line
- Global Factors: Risks include a sharp deterioration in global growth, increased risk aversion impacting capital flows, and a sustained rise in commodity prices, particularly oil. While India is less vulnerable to these shocks, it is not completely immune.
- Policy Risks: Structural risks involve potential changes in policy focus towards aggressive redistribution, which could undermine macro stability and the growth outlook.
- Outlook: India's expansion cycle is expected to continue, with GDP growth averaging 6.5% until 2030. The economy is projected to grow to $8 trillion by 2032 from $3.8 trillion in 2024, contributing significantly to global growth.
UPSC Mains Questions
Q. Examine the impact of recent policy reforms on India's economic growth cycle. How have these reforms contributed to macro stability and global integration?
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