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India 2025: Navigating an uncertain world
Context:
India begins 2025 on a reflective note, marked by the passing of Dr. Manmohan Singh, a leader instrumental in initiating bold economic reforms in 1991, which set India on a trajectory of rapid growth. As the government, led by Prime Minister Narendra Modi, reiterates its ambition of achieving a $30 trillion economy by 2047, challenges in growth, global uncertainties, and economic diplomacy demand immediate attention.
State of the Indian Economy:
- Growth Trends: After impressive growth in FY22 (8.7%), FY23 (7.2%), and FY24 (8.2%), driven by public capital expenditure and surging service exports, growth slowed to 5.4% in Q2 FY25. Analysts anticipate this to be a temporary dip.
- Rupee Depreciation: The rupee’s depreciation to ~86 per dollar poses challenges, improving competitiveness but increasing import costs and risks for unhedged borrowing.
- Fiscal Policy: With public debt at 83% of GDP and a fiscal deficit of 4.9% projected for FY25, aggressive privatisation and state-level financial consolidation are critical. Despite promises of reducing the deficit to 4.2% in FY26, delays in reforms persist.
- Private Investment: The absence of robust private sector investment reflects weak demand due to a K-shaped recovery and low capacity utilisation (75%).
State of India’s Economic Diplomacy:
- UK and EU: Negotiations for trade deals remain slow. The EU’s Climate Border Adjustment Mechanism adds complexity.
- USA: With Donald Trump’s policies likely to focus on reciprocal tariffs, India must proactively negotiate a trade and investment deal. Priorities should include expanding bilateral trade (projected to reach $500–$600 billion by 2030) and reducing deficits by opening markets to US imports (e.g., energy, defence).
- Migration Policies: India’s nearly 800,000 undocumented migrants in the US risk deportation. Negotiations on H1-B visas and Green Cards are essential.
Drivers Towards a $30 Trillion Economy:
- Digital Economy: Expected to grow from $175 billion (2023) to $1 trillion by 2026, contributing 20% to GDP by 2026. Key factors include UPI growth, 5G/6G innovations, and AI advancements.
- New Technologies: Investments in AI, global capability centres (GCCs), and quick commerce are transformative.
- Bridging the Digital Divide: Rural teledensity has risen from 44.67 (2014) to 58.39 (2024). However, further investment in rural connectivity is crucial for inclusive growth.
Four Risks to the Economy:
- Conflict Escalation: While less likely to materialise, any escalation could disrupt global supply chains and trade.
- Trade and Tariff Uncertainty: Rising protectionism and potential US-China trade wars could hinder global and Indian growth.
- Lower Migration: A decline in global migration flows may limit remittances and skilled labour mobility.
- Tightening Global Financial Conditions: Slower interest rate cuts by the US Fed could strain global liquidity and impact emerging markets like India.
Challenges to Reviving India’s Economy:
- Global Uncertainties: Worsening global financial conditions, trade wars, and protectionism remain significant hurdles.
- Structural Reforms: Delays in second-generation reforms in labour, land, and infrastructure could impede growth.
- Fiscal Constraints: High public debt limits fiscal flexibility, making privatisation and fiscal consolidation urgent.
Way Forward:
- Inclusive Growth Model: Address the K-shaped recovery by encouraging labour-intensive manufacturing through cooperative and competitive federalism.
- Boosting Private Investment: Focus on land and labour reforms, reducing red tape, and enhancing ease of doing business to attract investments.
Should India Join Regional Trade Blocks?:
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