India is increasingly recognized as an economic powerhouse on the global stage, thanks to its rapid growth and diverse economy. With a booming tech industry, a vast workforce, and a strong manufacturing sector, India is making significant strides in various fields. The country’s large population and growing middle class have fueled demand for goods and services, attracting investments from around the world. India’s economic strength is not just limited to cities but is also spreading to rural areas, creating opportunities and lifting millions out of poverty. Despite challenges, India’s economy continues to expand, solidifying its position as a major player in the global market.
Tags: GS-3, Economy- Growth & Development- Infrastructure – Inclusive Growth
For Prelims: India’s economic growth, World Economic Outlook, Reserve Bank of India, National Monetization Pipeline, Retail inflation, Make in India program, PLI schemes, Fiscal deficit, Gini coefficient, E-commerce
For Mains: Major Factors Propelling Economic Growth in India, Current Major Challenges in India’s Economic Growth
Context:
- India is expected to become the third-largest economy in the world with a GDP of $5 trillion in the next three years and touch $7 trillion by 2030.
- India is the 5th largest with a GDP of $3.7 trillion (estimate FY24), despite the pandemic and despite inheriting an economy with macro imbalances and a broken financial sector.
Major Factors Propelling Economic Growth in India:
- IMF Projection (World Economic Outlook, April 2024):
- The IMF has revised India’s GDP growth forecast for FY 2024-25 to 6.8%, an increase of 0.3 percentage points from its January 2024 projection.
- For FY 2025-26, India’s GDP growth is projected at 6.5%.
- United Nations Projection (World Economic Situation and Prospects, mid-2024):
- India’s economy is expected to grow by 6.9% in 2024 and 6.6% in 2025.
- The 6.9% growth forecast for 2024 is an upward revision from the earlier 6.2% projection made in January 2024.
- Reserve Bank of India:
- The Reserve Bank of India expects India’s real GDP to grow by 7% in 2024-25.
- GDP growth is pegged at 7.2% in the June 2024 quarter, with a moderation to 6.8% in the September 2024 quarter.
Major Factors Propelling Economic Growth in India
- Strong Domestic Demand:
- Private consumption growth, driven by rising incomes and an expanding middle class, is a major contributor to economic growth.
- Private consumption expenditure grew by 3.5% year-over-year in Q3 of FY 2024, with demand for luxury and premium goods and services growing faster than for basic goods.
- Robust Investment Activity:
- Private investment grew by 10.6% year-over-year in Q3 of FY 2024, indicating a revival in the private capital expenditure cycle.
- Initiatives like the National Monetization Pipeline aim to unlock value in Brownfield infrastructure assets and attract private investment.
- Budgeted capital expenditure is projected to increase to ₹11 trillion in 2024-25, nearly 4.5 times the level in 2014-15.
- Moderating Inflation:
- Inflation has been on a downward trend, with retail inflation at 4.83% in April 2024, providing a stable environment for businesses and consumers, thereby encouraging spending and investment.
- Manufacturing Resurgence:
- The manufacturing sector grew by 11.6% year-over-year in Q3 of FY 2024, driven by initiatives like Make in India and PLI schemes.
- The push towards self-reliance (Aatmanirbhar Bharat) is enhancing domestic manufacturing capabilities.
- Services Sector Resilience:
- The services sector, which accounts for a significant share of India’s GDP, grew by 7% year-over-year in Q3 of FY 2024.
- The IT and IT-enabled services sector continues to drive growth, and the easing of Covid-19 restrictions has led to a strong recovery in contact-intensive services like tourism, hospitality, and entertainment.
- The travel market in India is projected to reach USD 125 billion by FY 2027.
- Resilience to Global Headwinds:
- Despite global economic uncertainties and geopolitical tensions, India’s domestic demand has remained resilient.
- In 2023, while global food prices dropped, India’s food inflation remained high at 9.5% in December 2023, contrasting with global deflation of -10.1%.
- Supply Chain Diversification:
- Amid global supply chain disruptions, India has emerged as an attractive alternative for manufacturing investments, particularly in sectors like electronics and pharmaceuticals.
- Trade agreements like the India-UAE CEPA have facilitated supply chain diversification.
Current Major Challenges in India’s Economic Growth
- Employment Challenges:
- Despite steady GDP growth, the lack of substantial employment generation remains a significant policy challenge.
- The unemployment rate in India stood at 8.1% in April 2024.
- Export Competitiveness Challenges:
- Despite policy incentives, India’s exports contracted by 3% in FY24.
- The merchandise trade deficit increased to USD 19.1 billion in April 2024, up from USD 14.44 billion in April 2023.
- Potential Fiscal Slippage Risks:
- The general government fiscal deficit is projected at 6.8% of GDP by FY28, as per S&P Global.
- Any deviation from the fiscal consolidation path could adversely impact India’s credit ratings and borrowing costs.
- Skill Mismatch and Labor Quality:
- India faces a skills mismatch between the available workforce and industry requirements, which hampers productivity and job creation.
- Only 45% of Indian graduates applying for jobs are employable.
- Income Inequality:
- The gap between rich and poor in India remains significant.
- The Gini coefficient, a measure of income inequality, was 0.4197 in 2022-23, with the top 1% owning 40.1% of the nation’s wealth.
- Informal Sector Dominance:
- A large portion of India’s workforce is employed in the informal sector, characterised by low wages, minimal social security benefits, and limited productivity gains.
- The unorganised sector employs 83% of the workforce.
- Infrastructure Bottlenecks:
- Despite recent efforts, India’s infrastructure deficit persists in critical areas like power, transportation, and logistics.
- NITI Aayog estimates that India needs to invest USD 4.5 trillion in infrastructure by 2040 to sustain its growth momentum.
Measures to Accelerate Economic Growth in India:
- Expanding Manufacturing Sector:
- Boosting Manufacturing: To create job opportunities and absorb the workforce transitioning from agriculture, India needs to enhance its manufacturing sector.
- Targeted Training Programs: Implementing targeted training programs and providing incentives for industries to hire and skill agricultural workers can facilitate a smooth transition and improve overall productivity.
- Promoting Food Processing: Encouraging the growth of food processing industries will expand income opportunities for farmers, thereby supporting rural economies.
- Gig Economy Skilling:
- Micro-Skilling Initiatives: Partnering with online platforms like Uber and Meesho to develop micro-skilling programs tailored for the gig economy can equip youth with in-demand skills, enabling immediate job placements.
- National Online Marketplace: Creating a national online marketplace for freelance work will connect skilled individuals with businesses across India, empowering entrepreneurs and facilitating flexible work arrangements.
- Export Processing Zones (EPZs) 2.0:
- New-Age EPZs: Establishing modern EPZs focused on sustainability and technology, offering tax breaks and streamlined regulations, will attract green technology and high-value manufacturing companies.
- Supporting SMEs: Providing financial incentives and training programs to small and medium enterprises (SMEs) will equip them for e-commerce exports, enhancing their global competitiveness.
- Smart Taxation and Revamped Public-Private Partnerships (PPP):
- Smart Taxation: Leveraging technology for “smart taxation” can help close existing loopholes, widen the tax base, and enhance revenue collection.
- Innovative Tax Collection: Partnering with fintech companies to develop innovative tax collection solutions will improve efficiency.
- Next-Gen PPPs: Developing a new generation of PPPs with a focus on risk-sharing and performance-based incentives can attract private capital for infrastructure projects, ensuring value for money.
- Industry-Academia Collaboration:
- Curriculum Alignment: Fostering stronger collaboration between universities and industries will help align educational curricula with industry needs, preparing students for emerging job markets.
- Micro-Credentials: Introducing micro-credentials and stackable certifications allows individuals to continuously upskill and adapt to changing job demands.
- Learning from Ireland: India can take inspiration from Ireland’s market-driven industry-academic partnerships, which have effectively prepared the workforce for emerging technologies.
- Formalization Incentives:
- Incentivizing Formalisation: Offering tax breaks and easier access to credit for informal businesses transitioning to the formal sector will incentivize formalisation and increase tax revenue.
- Expanding Financial Inclusion: Utilising digital technologies to expand financial inclusion, such as providing access to bank accounts, micro-loans, and financial literacy programs, will support informal workers in the formal economy.
- Green Infrastructure Bonds:
- Sustainable Financing: Issuing green infrastructure bonds will attract private capital for sustainable infrastructure projects, such as renewable energy and public transportation.
- Data-Driven Development: Utilising big data analytics and artificial intelligence to identify critical infrastructure gaps will optimise resource allocation for project development, ensuring sustainable growth.
UPSC Civil Services Examination, Previous Year Questions (PYQs)
Prelims
Q:1 In the ‘Index of Eight Core Industries’, which one of the following is given the highest weight? (2015)
- Coal production
- Electricity generation
- Fertiliser production
- Steel production
Ans: (b)
Q:2 Increase in absolute and per capita real GNP do not connote a higher level of economic development, if: (2018)
- Industrial output fails to keep pace with agricultural output.
- Agricultural output fails to keep pace with industrial output.
- Poverty and unemployment increase.
- Imports grow faster than exports.
Ans: (c)
Q:3 In a given year in India, official poverty lines are higher in some States than in others because: (2019)
- Poverty rates vary from State to State
- Price levels vary from State to State
- Gross State Product varies from State to State
- Quality of public distribution varies from State to State
Ans: (b)
Mains
Q.1 “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product(GDP) in the post-reform period” Give reasons. How far are the recent changes in Industrial Policy capable of increasing the industrial growth rate? (2017)
Q.2 Normally countries shift from agriculture to industry and then later to services, but India shifted directly from agriculture to services. What are the reasons for the huge growth of services vis-a-vis the industry in the country? Can India become a developed country without a strong industrial base? (2014)
Source: IE
FAQs
Q: Why is India considered an economic powerhouse?
Answer: India is considered an economic powerhouse due to its large and growing economy, diverse industries, and significant contributions to global markets. With a young population, technological advancements, and a rapidly expanding middle class, India plays a key role in the global economy.
Q: What industries contribute to India’s economic strength?
Answer: Key industries include information technology (IT), pharmaceuticals, manufacturing, agriculture, and services. India’s IT sector is world-renowned, while its pharmaceutical industry is a major supplier of medicines globally. The manufacturing and agriculture sectors also contribute significantly to the economy.
Q: How does India’s population impact its economy?
Answer: India’s large and young population is both a strength and a challenge. On the positive side, it provides a vast workforce and a growing consumer base, which drive economic growth. However, it also requires the creation of millions of jobs and the provision of education and skills training.
Q: What role does India play in global trade?
Answer: India is a major player in global trade, exporting goods like textiles, electronics, software, and agricultural products to countries around the world. Its growing economy and strategic location also make it an important market for international businesses looking to expand.
Q: What challenges does India face as an economic powerhouse?
Answer: Despite its strengths, India faces challenges such as income inequality, infrastructure gaps, and the need for regulatory reforms. Addressing these issues is crucial for sustaining long-term growth and ensuring that the benefits of economic development reach all sections of society.
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