India will remain the fastest-growing major economy this year and next, boosted by continued strong government spending, according to a Reuters poll of economists who also said inflation was unlikely to surge again. The world’s most populous country performed better than expected in the first two quarters of this fiscal year to end-March, as the government steps up already-strong spending to bolster growth momentum running into a national election due in May. Much of Prime Minister Narendra Modi‘s government spending in recent years has gone into building infrastructure. Private investment and job creation have lagged, suggesting New Delhi will continue to play an outsized role in India’s economic growth.
The Jan. 10-23 Reuters poll of 54 economists predicted the economy will grow 6.9% this fiscal year, a small upgrade from 6.7% in a December poll. It was then forecast to expand 6.3% next fiscal year, the same as in the previous poll.
While inflation rose to the fastest pace in four months in December to 5.69%, driven by pressures from food prices, economists expect that to fade soon.
“We expect inflation to subside quite drastically in the short run, catching up to the downside with already-subdued core inflation,” said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics. “At the same time, though, these trends also reflect an enduring sluggishness taking hold in the economy, particularly with regards to private consumption, the most important aspect of growth.”
The survey showed consumer price inflation averaging 5.4% and 4.7% this fiscal year and next, with a majority of economists, 23 of 32, of the view the risk of a significant resurgence over the coming six months was low.
Consumer spending, which makes up 60% of Asia’s third-largest economy, has slowed. But a strong majority of economists, 25 of 28, said employment will improve in the next six months. Still, with job growth not matching the overall economic growth rate or the pace of millions of young people joining the workforce every year, the dip in consumption will likely take a toll.
“While the Indian economy is on a strong momentum…there are signs of a moderation on account of a weakness in private consumption demand,” said Suman Chowdhury, chief economist at Acuite Ratings and Research.
“But this will depend on the measures taken by the government to generate more employment and enhance the disposable incomes of a larger section of the population.”
The economy of India has transitioned from a mixed planned economy to a mixed middle-income developing social market economy with notable public sector in strategic sectors. It is the world’s fifth-largest economy by nominal GDP and the third-largest by purchasing power parity (PPP); on a per capita income basis, India ranked 139th by GDP (nominal) and 127th by GDP (PPP). From independence in 1947 until 1991, successive governments followed Soviet model and promoted protectionist economic policies, with extensive Sovietization, state intervention, demand-side economics, natural resources, bureaucrat driven enterprises and economic regulation. This is characterized as dirigism, in the form of the License Raj. The end of the Cold War and an acute balance of payments crisis in 1991 led to the adoption of a broad economic liberalization in India and indicative planning. Since the start of the 21st century, annual average GDP growth has been 6% to 7%. The economy of the Indian subcontinent was the largest in the world for most of recorded history up until the onset of colonialism in early 19th century.[54][55][56]
Nearly 70% of India’s GDP is driven by domestic consumption; country remains the world’s sixth-largest consumer market. Apart from private consumption, India’s GDP is also fueled by government spending, investments, and exports.
In 2022, India was the world’s 6th-largest importer and the 9th-largest exporter. India has been a member of the World Trade Organization since 1 January 1995. It ranks 63rd on the Ease of doing business index and 40th on the Global Competitiveness Index. With 476 million workers, the Indian labor force is the world’s second-largest. India has one of the world’s highest number of billionaires and extreme income inequality.
During the 2008 global financial crisis, the economy faced a mild slowdown. India endorsed Keynesian policy and initiated stimulus measures (both fiscal and monetary) to boost growth and generate demand. In subsequent years, economic growth revived. The period between 2004 and 2014 is referred to as India’s lost decade as India fell behind other BRIC economies.
In 2021-22, the foreign direct investment (FDI) in India was $82 billion. The leading sectors for FDI inflows were the service sector, the computer industry, and the telecom industry. India has free trade agreements with several nations and blocs, including ASEAN, SAFTA, Mercosur, South Korea, Japan, Australia, UAE, and several others which are in effect or under negotiating stage. The service sector makes up more than 50% of GDP and remains the fastest growing sector, while the industrial sector and the agricultural sector employs a majority of the labor force. The Bombay Stock Exchange and National Stock Exchange are some of the world’s largest stock exchanges by market capitalization.
India is the world’s sixth-largest manufacturer, representing 2.6% of global manufacturing output. Nearly 65% of India’s population is rural, and contributes about 50% of India’s GDP. India faces high unemployment, rising income inequality, and a drop in aggregate demand. India’s gross domestic savings rate stood at 29.3% of GDP in 2022. In recent years, independent economists and financial institutions have accused the government of manipulating various economic data, especially GDP growth. India’s overall social spending as a share of GDP in 2021-22 will be 8.6%, which is much lower than the average for OECD nations.
India could be $5 trillion economy by 2025
The Indian economy is poised to touch USD 5 trillion next financial year – 2024-25 – and capitalise to double to USD 10 trillion by the end of this decade, said Union Petroleum Minister Hardeep Puri. At present, the Indian economy is estimated to be about USD 3.7 trillion.
“I was somewhere told that we would be a USD 5 trillion economy by 2028. I told him that there is no need to wait until 2028; it will happen by 2024-25. We will then be a 10 trillion dollar economy by 2030,” Puri, who is also Urban and Housing Affairs Minister, said.
Global interest in India, he added, is increasing by the day, be it in digital infrastructure, the automobile market, energy or biofuels. “So, it (the Indian economy) is looking very good,” the minister said.
India’s Challenges
Prime Minister Modi is a Hindu nationalist leader. Many blame him for the violence against Muslims while he was governor of India’s Western region of Gujarat.
Modi is up against India’s bloated government bureaucracy. That makes the execution of any fiscal or monetary policy difficult. In August 2015, he was blocked from passing a bill to acquire land to promote infrastructure.
U.S. monetary policy has hurt India’s economy. For example, when the Federal Reserve began its quantitative easing program, the value of India’s rupee fell. The resulting inflation forced India’s central bank to raise its interest rates. This action slowed India’s economic growth, eventually resulting in what some called mild stagflation in 2013. India had 10.9% inflation for the year and a growth rate of 6.4%. Slow growth came from contractionary monetary policy to stem inflation. By 2017, inflation had slowed to 3.6%.
Investors backed off from India and other emerging markets when the U.S. Federal Reserve began tapering its quantitative easing program. When the dollar surged in 2014, it forced the value of the rupee and other emerging market currencies down.
Climate change threatens India’s attempts to improve its citizens’ standard of living. More than 600 million Indians face acute water shortages. Bangalore and New Delhi are two of the 21 cities that could deplete their groundwater in 2020. In July 2019, the city of Chennai ran out of groundwater. Over 200,000 people die from contaminated water. By 2030, 40% of the population will have no access to drinking water.
Most of India’s rainwater falls during the four-month monsoon season. It isn’t captured efficiently. Climate change will increase flooding from these monsoons.
The Indus River depends on water from the Hindu Kush-Himalaya glaciers. If nothing is done to reduce greenhouse gases, studies estimate that anywhere from 35% to 94% will melt by 2100. Sea level rise threatens India’s 4,660 miles of coastline. It threatens megalopolises like Mumbai, Chennai, and Kolkata, which are home to over 48 million people. Many of these cities are built on landfill. In Mumbai, seawater spills onto the main oceanside promenade during high tide.