India’s economy seen re-entering the fast lane

India's economic growth, in terms of real gross domestic product (ie GDP at constant prices), is estimated at 6.4 per cent in FY25 (as per first advance estimates of national income), which is equal to an average for the past 10 years.

Real gross value added (GVA) is also estimated to grow by 6.4 per cent FY25.

Against this, the global economy on an average grew 3.3 per cent in 2023 against the IMF projection of 3.2 per cent growth in the next five years.

India’ s real GDP in FY26 is expected to grow between 6.3 and 6.8 per cent, in view of the upsides and downsides to growth.

Government expects structural reforms and deregulation at the grassroots level to reinforce medium-term growth potential and boost global competitiveness of the Indian economy.

However, geopolitical tensions, ongoing conflicts and global trade conflicts continue to pose significant challenges to the global economic outlook.

Inflation woes somewhat eased with consumer price inflation softening from 5.4 per cent in FY24 to 4.9 per cent in April-December 2024.

Capital expenditure improved continuously from FY21 to FY24. Capex growth continued after the general elections, reaching 8.2 per cent in July-November 2024.

India has the seventh-largest share in global services exports, which underscores the country’s global competitiveness in the sector.

During April-December 2024 India’s merchandise exports grew 9.1 per cent s amid volatile global conditions.

Financial sector developments

In the financial sector, bank credit has grown at a steady pace with credit growth converging towards deposit growth.

Profitability of scheduled commercial banks improved, which was reflected in a fall in gross non-performing assets (GNPAs) and rise in capital to risk weighted asset ratio (CRAR).

Credit growth also outpaced nominal GDP growth for two successive years, leading to the narrowing of credit-GDP gap to (-) 0.3 per cent in Q1 of FY25 from (-) 10.3 per cent in Q1 of FY23, also indicating sustainable bank credit growth.

Gross non-performing assets (GNPAs) of scheduled commercial banks declined to a 12-year low of 2.6 per cent of gross loans and advances at the end of September 2024.

Banks also recovered Rs3.6 lakh crore, through the Insolvency and Bankruptcy Code process, from resolution of 1,068 plans till September 2024. This amounts to 161 per cent against the liquidation value and 86.1 per cent of the fair value of the assets involved.

Indian stock markets outperformed its emerging market peers. Total resource mobilisation from primary markets (equity and debt) increased 5 per cent year-on-year to Rs11.1 lakh crore between April and December 2024.

BSE stock market capitalisation to GDP ratio stood at 136 per cent at the end of December 2024, far higher than other emerging market economies like China (65 per cent) and Brazil (37 per cent).

India’s insurance market continued its upward trajectory, with total insurance premiums growing by 7.7 per cent to Rs11.2 lakh crore in FY24.

India's pension sector experienced significant growth, with the total number of pension subscribers growing by 16 per cent (YoY) as of September 2024.

External sector

India’s external sector continues to display resilience with overall exports growing 6 per cent (YOY) in the first nine months of FY25. Services sector exports grew 11.6 per cent during the period.

India had 10.2 per cent share of the global export market in the export of telecommunication equipment, computers and information services’, ranking as the second largest exporter in the world, as per Unctad ranking.

India’s current account deficit (CAD) stood at 1.2 per cent of GDP in Q2 of FY25, supported by rising net services receipts and an increase in private transfer receipts.

Gross foreign direct investment (FDI) inflows increased from $47.2 billion in the first eight months of FY24 to $55.6 billion in the same period of FY25, a growth of 17.9 per cent.

India’s forex reserves stood at $640.3 billion as of end-December 2024, which is sufficient to cover 10.9 months of imports and approximately 90 per cent of the country’s external debt.

India’s external debt remained stable over the past few years, with the external debt to GDP ratio standing at 19.4 per cent at the end of September 2024.

Inflation

As per the IMF, the global inflation rate moderated to 5.7 per cent by 2024 from its peak of 8.7 per cent in 2022.

Consumer price inflation in India eased from 5.4 per cent in FY24 to 4.9 per cent in FY25 (April-December 2024). RBI and the IMF project India’s consumer price inflation to gradually move to the target range of around 4 per cent in FY26.

Development of climate-resilient crop varieties and enhanced farming practices are seen essential for mitigating the effects of extreme weather conditions and achieve long-term price stability.

Deregulation to drive medium-term growth

Indian economy is in the middle of a change that represents an unprecedented economic challenge and opportunity. Geo-Economic Fragmentation (GEF) is replacing globalisation, which in turn is leading to faster economic realignments and readjustments.

To realise the vision of Viksit Bharat by 2047 India will need to achieve a growth rate of around 8 per cent at constant prices, on average, for about a decade or two.

Over the medium term, India must consider the new global realities like GEF, China's manufacturing prowess, and dependency of efforts for energy transition on China.

India should focus on systematic deregulation to reinvigorate the domestic levers of growth and empower individuals and organisations to pursue legitimate economic activity with ease.

Systemic deregulation or enhancing economic freedom for individuals and small businesses is widely considered as the most important policy priority to bolster India's medium-term growth prospects.

State governments must also start liberalising standards and controls, by setting legal safeguards for enforcement, while reducing tariffs and fees, and applying risk-based regulation.

Infrastructure investment 

The government’s focus in the last five years was on increasing public spending on infrastructure, and speeding up approvals and resource mobilisation. In fact, the union government‘s capital expenditure on key infrastructure sectors has grown at a rate of 38.8 per cent from FY20 to FY24.

To improve railway connectivity, 2,031 km of railway network was commissioned between April and November 2024, while 17 new pairs of Vande Bharat trains were introduced between April and October 2024.

To improve road network, 5,853 km of national highways was constructed in April-December FY25.

Under the National Industrial Corridor Development Programme, a total of 383 plots covering 3,788 acres have been allotted for industrial use for various sectors in phase 1.

In the shipping and ports sector, operational efficiency improved leading to a reduction in average container turnaround time in major ports from 48.1 hours in FY24 to 30.4 hours during FY25 (Apr-Nov), significantly improving port connectivity.

With a 15.8 per cent year-on-year increase in renewable energy capacity of solar and wind power by December 2024, the share of renewable energy in India’s total installed capacity now stands at 47 per cent.

New schemes like DDUGJY and SAUBHAGYA helped improve access to electricity in rural areas, electrifying 18,374 villages and providing electricity to 2.9 crore households.

Digital connectivity initiatives have gained traction, particularly with the rollout of 5G services across all states and union territories by October 2024. Efforts to provide 4G mobile services to remote areas under the Universal Service Obligation Fund (now Digital Bharat Nidhi) have made significant strides, with over 10,700 villages covered by December 2024.

Under the Jal Jeevan Mission, over 120 million families have gained access of piped drinking water since its launch.

Under Phase II of the Swachh Bharat Mission-Grameen, during April-November 2024, an additional 1.92 lakh villages were declared ODF Plus under the model category, taking the total number of ODF Plus villages to 3.64 lakh.

In urban areas, the Pradhan Mantri Awas Yojana has completed construction of over 89 lakh houses.

City transportation network is expanding rapidly, with metro and rapid rail systems, covering over 1,000 kilometers, are operational or under construction in 29 cities.

India currently operates 56 active space assets. The government‘s Space Vision 2047 includes ambitious projects like the Gaganyaan mission and the Chandrayaan-4 Lunar Sample Return Mission.

Reforms in industrial sector

The industrial sector expected to grow by 6.2 per cent in FY-25 (first advance estimates), driven by robust growth in electricity and construction. Government has been actively promoting Smart Manufacturing and Industry 4.0, through the establishment of SAMARTH Udyog centres.

In FY24, the Indian automobile domestic sales grew 12.5 per cent.

Domestic production of electronic goods has grown at a CAGR of 17.5 per cent between FY15 and FY24. About 99 per cent smartphones used in India are now manufactured domestically, drastically reducing India’s dependence on imports.

The total annual turnover of pharmaceuticals in FY24 stood at Rs4.17 lakh crore, growing at an average rate of 10.1 per cent in the last five years.

As per the WIPO Report 2022, India ranks sixth among the top 10 patent filing offices globally.

Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant sector of the Indian economy. Government has launched the Self-Reliant India Fund with a corpus of ₹50,000 crore to provide equity funding to MSMEs with the potential to scale up.

The government is implementing the Micro and Small Enterprises-Cluster Development Programme to develop clusters across the country.

Service sector challenges

The service sector’s contribution to total GVA has increased from 50.6 per cent in FY14 to 55.3 per cent in FY25 (First Advance Estimates).

The average growth rate of the services sector was 8 per cent in the pre-pandemic years (FY13 -FY20). It stood at 8.3 per cent in the post-pandemic period (FY23–FY25).

India had a 4.3 per cent share in global services exports in 2023, ranking seventh worldwide. Services export growth surged to 12.8 per cent during April–November FY25, up from 5.7 per cent in FY24.

Information and computer-related services grew at a trend rate of 12.8 per cent over the last decade (FY13–FY23), increasing their share of overall GVA from 6.3 per cent to 10.9 per cent.

Indian Railways recorded an 8 per cent growth in passenger traffic originating in FY24. Revenue-earning freight in FY24 grew by 5.2 per cent.

The tourism sector’s contribution to GDP returned to its pre-pandemic level of 5 per cent in FY23.

Agriculture and food management

The ‘Agriculture and Allied Activities‘ sector contributes approximately 16 per cent of the country’s GDP for FY24 (PE) at current prices. High-value sectors like horticulture, livestock, and fisheries are now the key drivers of overall agricultural growth.

Kharif foodgrain production for 2024 is expected to reach 164.71 million tonnes, an increase of 8.94 million tonnes from the previous year.

The government has increased support prices for Arhar and Bajra by 59 per cent and 77 per cent over the weighted average cost of production, respectively,. for the fiscal year 2024-25.

The fisheries sector has shown the highest compound annual growth rate (CAGR) of 8.7 per cent, followed by livestock with a CAGR of 8 per cent.

Government extended the provision of free food grains under PMGKAY for another five years, to ensure food and nutrition security.

As of 31 October, over 110 million farmers have benefitted from the PM-KISAN scheme, while 23.61 lakh farmers have been enrolled under PM Kisan Mandhan.

Climate and environment adaptation 

India’s ambition to achieve developed nation status by 2047 is anchored on the vision of inclusive and sustainable development.

India now has installed electricity generation capacity of 2,13,701 megawatts from non-fossil fuel sources, which accounts for 46.8 per cent of the total capacity as of 30 November 2024.

As per the Forest Survey of India 2024 an additional carbon sink of 2.29 billion tonnes CO2 equivalent has been created since 2005. The India-led global movement, Lifestyle for Environment (LiFE), aims to enhance the country’s sustainability efforts.

By 2030, it is estimated that LiFE measures could save consumers around $440 billion globally through reduced consumption and lower prices.

Social empowerment

The social sector expenditure of the government (combined for the centre and states) increased at a compound annual growth rate of 15 per cent from FY21 to FY 25.

With the implementation of various fiscal policies of the government aiding in reshaping the income distribution, the Gini coefficient, a measure of inequality in consumption expenditure, is declining. For rural areas it declined to 0.237 in 2023-24 from 0.266 in 2022-23, and for urban areas, it fell to 0.284 in 2023-24 from 0.314 in 2022-23. 

Government health expenditure increased from 29.0 per cent to 48.0 per cent while the share of out-of-pocket expenditure in total health expenditure declined from 62.6 per cent to 39.4 per cent, reducing financial burden on by households.

The Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB PM-JAY) has played a decisive role in the significant reductions in expenditure with over Rs1.25 lakh crore in savings to beneficiaries.

The strategy of Localisation of Sustainable Development Goals (SDGs) has been adopted to ensure that budgets at the Gram Panchayat levels align with the SDG objectives.

Employment and skill development

The labour market indicators have improved with unemployment rate declining to 3.2 per cent in 2023-24 (July-June) from 6.0 per cent in 2017-18 (July-June).

With around 26 per cent of the population in the age group of 10-24 years, India has a unique demographic opportunity as one of the youngest nations globally.

To give a fillip to women's entrepreneurship, the government has launched several initiatives in terms of easier access to credit, marketing support, skill development, and support to women start-ups, etc.

The growing digital economy and renewable energy sectors are providing enhanced opportunities for job creation, essential for achieving the Viksit Bharat’s vision.

The government is establishing a resilient and responsive skilled ecosystem to keep pace with emerging global trends such as automation, generative AI, digitalisation, and the effects of climate change.

The government has implemented measures to boost employment, foster self-employment, and promote worker welfare.

The recently launched PM-Internship Scheme is emerging as a catalyst for employment generation.

The net payroll additions under EPFO have also more than doubled in the past six years, signalling healthy growth in formal employment.

Labour in the AI era

Developers of Artificial Intelligence (AI) promise to usher in a new age, where a bulk of the economically valuable work will get automated. AI is anticipated to surpass human performance in critical decision-making across various fields, including healthcare, research, criminal justice, education, business, and financial services.

However, barriers to large-scale AI adoption, which include concerns over reliability, resource inefficiencies, and infrastructure deficits, along with AI’s experimental nature pose challenges to AI adaptation and create a window for policymakers to act.

Fortunately, due to AI presently being in its infancy, India has the time necessary to strengthen its foundations and mobilise a nation-wide institutional response.