Report on the current state of the Indian economy

The Indian economy is recovering from a slowdown, but faces challenges like high unemployment and rising inequality, despite boasting a strong domestic savings rate.

Tag: GS Paper – 3 – indian economy – Growth & Development

For Prelims: GDP deflator, Nominal GDP, Monsoon, Scheduled commercial banks, Pradhan Mantri Street Vendor’s AtmaNirbhar Nidhi (PM SVANidhi), Jan Dhan Yojana, Production Linked Incentive (PLI), Phased Manufacturing Programme (PMP)

For Mains: India’s GDP Growth Potential, Factors Driving Economic Growth, Steps that can be taken to make this growth more robust and sustainable

Context:

India’s various current economic aspects such as, GDP growth, inflation, consumption trends, investment activities, foreign investments, financial indicators.
GDP growth at 8.4% in the third quarter of 2023-24, alongside a notable surge in the Purchasing Managers’ Index (PMI) Manufacturing, reaching a 16-month high of 59.1 in March.

Concerns:

GDP growth is predominantly fueled by investment, while consumption growth lags behind.
Consumption GDP expanded by 3% this year, contrasting with a pre-pandemic growth of 7% in 2018-19. This indicates subdued consumer spending despite overall economic growth.
The FMCG and apparel sectors are experiencing the brunt of cautious consumer spending.
There are apprehensions regarding potential layoffs and weak hiring in the IT sector, which could adversely impact urban consumer sentiments.

Positive Signs:

Rural Demand:

Previously low rural demand is now showing signs of improvement.
FMCG volume growth in rural areas increased from 2.2% to 6.2% in the second half of 2023, according to a Nielsen report.
Two-wheeler sales, a key rural demand indicator, are also on the rise.
Assuming a normal monsoon, overall consumption demand is expected to further increase.

Private Investment:

Increased private sector investment is essential for sustained growth momentum.
Sectors like steel, cement, petrochemicals, automobiles, aluminium, and renewable energy have witnessed heightened private sector investment.
Capital goods companies have experienced a significant uptick in their order books in the last fiscal year.
Manufacturing sector capacity utilisation stands at 74%, nearing the long-term average, indicating a potential acceleration in the private capex cycle in the upcoming quarters.
CMIE data reflects a heightened intent by the private sector to invest in projects.

Capital Expenditure (Capex):

The government remains committed to stimulating growth through capital expenditure (capex).

Structural Developments:

Digitalization and increased formalisation have elevated India’s potential growth to a higher level.

Current Account Deficit:

Weak merchandise exports due to global slowdown, but services exports remained healthy.
Software services, business consulting, and travel services showed good performance.
Expected to keep India’s current account deficit low at 0.6-0.7% of GDP in 2023-24 and around 1% in 2024-25.

Foreign Investments:

Strong foreign institutional investor (FII) inflows were observed, boosting forex reserves to around $643 billion.
FII inflows reached $41 billion in 2023-24, compared to net outflows of $5.5 billion in the previous year.
Continued strong FII inflows expected in 2024-25 due to the inclusion of Indian government bonds in global indices, but caution is needed due to volatility.

Inflation:

CPI inflation decreased below RBI’s upper target band of 6%.
Core inflation below 4% for the past three months, mainly due to disinflation in the services sector.
High food inflation, particularly in vegetables (30%), pulses (19%), and spices (14%), remains a concern.
Assuming a normal monsoon, CPI inflation is expected to decrease to around 4.8% in 2024-25 from estimated 5.4% in 2023-24.

Credit Growth:

Despite higher interest rates, retail credit significantly increased.
RBI raised risk weightage for unsecured personal loans to address risks, slowing down growth of personal loans to around 18%.
Trend of high retail credit growth expected to continue due to changing consumption and saving patterns and easy access to credit.
No indications of strain in banks’ retail loans, with a healthy credit ratio at 1.92 in the second half of 2023-24.

UPSC Civil Services Examination, Previous Year Questions (PYQs)

Prelims:

Q:1 Increase in absolute and per capita real GNP do not connote a higher level of economic development, if: (2018)

(a) Industrial output fails to keep pace with agricultural output.

(b) Agricultural output fails to keep pace with industrial output.

(d) Imports grow faster than exports.

Ans: (c)

Q:2 In a given year in India, official poverty lines are higher in some States than in others because: (2019)

(a) Poverty rates vary from State to State

(b) Price levels vary from State to State

(d) Quality of public distribution varies from State to State

Ans: (b)

Mains

Q1. Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realising its potential GDP? (2020)

Q2. Explain the difference between computing methodology of India’s Gross Domestic Product (GDP) before the year 2015 and after the year 2015. (2021)

Source: (IE)

FAQs

1. Is the Indian economy growing?

Yes, India’s economy is currently experiencing growth. The International Monetary Fund (IMF) and World Bank both predict GDP growth for India in 2024 [sources: IMF, World Bank]. However, the exact growth rate can vary depending on the source.

2. Are there any challenges facing the Indian economy?

Yes. While the economy is growing, there are challenges. These include:

Inflation: Rising prices of goods and services can affect purchasing power [source: Reserve Bank of India].
Unemployment: Though improvements are being made, unemployment remains a concern [source: Centre for Monitoring Indian Economy].
Global factors: The ongoing war in Ukraine and potential slowdowns in other major economies could impact India’s exports and foreign investment.

3. What are the bright spots in the Indian economy?

There are positive signs as well:

Strong domestic consumption: Consumer spending is a major driver of the Indian economy, and it is expected to remain robust [source: McKinsey & Company].
Government reforms: Initiatives to improve infrastructure and attract investment are underway.
Digital transformation: The growth of the digital economy is creating new opportunities.

4. What sectors are doing well in India?

Several sectors are showing strong growth, including:

Information technology (IT) and IT-enabled services (ITES)
Manufacturing, particularly auto and pharmaceuticals
Renewable energy

5. Where can I find more information about the Indian economy?

Here are some resources for further reading:

Reserve Bank of India
Ministry of Finance, Government of India
World Bank India
International Monetary Fund India

In case you still have your doubts, contact us on 9811333901.

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Report on the current state of the Indian economy – UPSC