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13th June 2024 (13 Topics)

World Bank's Global Economic Prospects

Context

The World Bank recently released its June edition of the 'Global Economic Prospects' report, offering insights into the current and future state of the global economy. Among its findings, India stands out as a key player, retaining its position as the “fastest-growing major economy” globally, albeit with a projected slowdown in growth.

Key Findings:

  • India's Growth Trajectory:
    • India is expected to maintain its status as the fastest-growing major economy, with a forecasted GDP growth rate of 6% for the fiscal year 2024-25.
    • This growth, while slightly slower, is still robust, primarily driven by strong public and private investment despite a moderation in investment growth.
    • In the previous fiscal year (2023-24), India's GDP growth exceeded expectations, reaching 7.8%, contributing significantly to regional growth in South Asia.
  • South Asian Region:
    • While India's growth is expected to moderate slightly, it will still play a crucial role in sustaining regional growth, with other economies like Bangladesh, Pakistan, and Sri Lanka anticipated to maintain or strengthen their economic activities.
    • Fiscal and Trade Balances:
      • Fiscal health in South Asian countries is gradually improving, with India's fiscal deficit projected to decrease relative to GDP due to increased revenues.
      • Trade deficits are narrowing, particularly in India, contributing to overall economic stability in the South Asian region.

Global Economic Outlook:

  • The global economy is showing signs of stabilization in 2024 after a tumultuous period, with GDP growth projected at 2.6% for the year, a slight increase from earlier estimates.
  • However, this stabilization remains weak compared to historical standards, with global growth expected to hover around 2.7% in the following years, driven by modest growth in trade and investment.
  • Global Inflation Projection: Global inflation is expected to moderate but at a slower pace than previously anticipated, with central banks likely to remain cautious about easing monetary policy.
  • Risks to Global Growth: Despite improved near-term prospects, the global outlook remains subdued, with geopolitical tensions, trade fragmentation, higher interest rates, and climate-related disasters posing significant risks.

Factors Driving India's Economic Growth:

  • Demographic Dividend: India's large and youthful population serves as a significant driver of economic growth, providing a vast workforce and consumer base.
  • Infrastructure Development: Government investments in infrastructure projects, such as roads, railways, and ports, improve connectivity and facilitate economic activities across the country.
    • Bharatmala project for roads and Sagarmala project for ports
  • Industrial and Services Sector Growth: The industrial and services sectors, including manufacturing, IT services, and finance, have experienced robust growth, contributing significantly to India's GDP.
  • Foreign Direct Investment (FDI): Liberalization of FDI policies has attracted foreign investment, fostering economic development and technological advancement in various sectors.
  • Urbanization and Urban Development: Rapid urbanization has led to the growth of cities as hubs of economic activity, driving demand for housing, services, and consumer goods.
  • Innovation and Entrepreneurship: India's thriving startup ecosystem and emphasis on innovation and entrepreneurship have led to the emergence of new businesses and industries, contributing to economic growth.
  • Policy Reforms: Structural reforms aimed at simplifying regulations, improving ease of doing business, and promoting investment have bolstered economic growth and competitiveness.
  • Strengthened banking system: Gross Non-Performing Assets (NPAs) reduced from 9.1% as of March 2019 to 3.2% as of September 2023 with the implementation of the Insolvency and Bankruptcy Code (IBC)
  • Boosting the manufacturing-focused sectors: Policies like the Production Linked Incentives (PLI) schemes introduced across various sectors (electronics, mobile phones, pharmaceuticals, and food processing).  
    • India’s manufacturing sector contributes 17% to GDP and employs 27.3 million workers.
    • Government aims to raise manufacturing's share to 25% by 2025.
  • Sector-specific Initiatives: The government launched initiatives and schemes targeting specific sectors, such as:
    • Make in India, Digital India, and Skill India
  • Emergence of gig workers, currently constituting 1.5 percent of the workforce, is expected to increase their contribution to total employment to 4.1 percent by 2029-30.
  • Social Welfare Programs: The government implements social welfare programs, such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and the National Health Mission (NHM), to alleviate poverty, improve human capital, and enhance social inclusivity.
  • Important Government Interventions: Digital India programme, Pradhan Mantri Kaushal Vikas Yojana, Startup India, Production-Linked Incentive in strategic sectors, PM Vishwakarma Yojana
Concerns for India
  • Inflation has been a persistent concern in India's economy. 
  • Income inequality: Inequality in India has skyrocketed since the early 2000s, with the income and wealth share of the top one per cent of the population rising to 22.6 per cent and 40.1 per cent, respectively, in 2022-23.
  • Infrastructure Bottlenecks: Inadequate transportation networks, power shortages, and urban congestion, hinder productivity, competitiveness, and sustainable development.
  • Agrarian Distress: Share of agriculturein India's GDP declined to 15 per cent last fiscal year from 35 per cent in 1990-91 
  • Unemployment and Underemployment: With the massive increase in educational attainment, the unemployment problem is becoming centred around educated youth. (India Employment Report 2024)
  • As per the National Statistical Office’s (NSO) Periodic Labour Force Survey (PLFS) report for 2021-22, the unemployment rate was 4.1%
  • Geopolitical Tensions: Trade disputes, geopolitical conflicts (Russia-Ukraine, Israel-Hamas), and geopolitical shifts, can disrupt global supply chains, trade flows, and investor confidence, affecting India's economic prospects.
  • Climate Change poses threats to public health, ecological sustainability, and long-term economic growth prospects.

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