Prof M K Bhat
The GDP growth rate projection of 6.4 percent by National statistical organization after extrapolation of data of first seven -eight months of the ongoing financial year 2024-25 not only provides a sordid story of economic slowdown but is also expected to give direction to the budget 2025-26.The growth rate projected by NSO is down from finance ministry earlier estimate of 6.5 to 7 percent in the economic survey 2023 -24. The projection is even lower than the recent Reserve Bank of India’s estimate of 6.6 per cent for the current fiscal year ending March 2025.The slowdown is emphatically visible in the manufacturing sector, its share of GVA has come down from 9.9 percent in 2023-24 to 5.3 per cent in the advance projections of NSO ; mining and quarrying has come down from 7.1 % to 2.9%, agriculture has emerged as the only ray of hope in primary and secondary sector as it has increased its share from 1.4 % to 3.8%. The demand for goods has come down more in urban areas while as it has not dipped so much in rural areas.This downturn if not contained immediately in the Budget can make difficult for the government to attain its target of Vikshit Bharat. It can also influence the government to downsize its expenditure on public welfare schemes.This economic slowdown has been mainly due to the contraction of demand both at domestic and at international level.
At international level an atmosphere of global uncertainty in last two quarters became visible due to wars among countries, China’s economic changes and USA elections. Firstly, the geopolitical situations were aggravated by Israel attack on its neighboring countries like Lebanon, Syria and Iran. The geopolitical concerns weigh heavily on global investors investment decisions. The ongoing Russia – Ukraine war along with the intensification of Israel and Iran war in October, led to a brief impact on oil prices and a contagion impact on the global supply chains. Secondly, Emerging markets including India witnessed capital outflows after the stimulus announcements in China on 25 September, 2024 to address its own economic challenges stemming from a prolonged property market slump, weak consumer confidence, and economic slowdown. The package introduced several measures to revitalize its key sectors with a focus on monetary easing, property market stabilization, and bolstering stock markets. The RRR was cut by 0.5 percentage points, which was expected to inject around RMB 1 trillion (US$137 billion) in liquidity into the financial system of China. Net FII investments declined sharply to levels last seen at the onset of COVID-19. Thirdly, the uncertainty was further aggravated by US election results which is expected to bring changes in trade and investment relations as the new incumbent bears a different view about the current geopolitics. The possibility of higher trade tariffs will likely have an adverse effect on India’s export growth and current account balance.
At domestic level the slowdown was mainly due to inflation in food articles, low employment, high taxes, GST and delay in decisions due to elections. India’s retail inflation has been volatile due to higher food prices. Barring two months, inflation has been above RBI’s target inflation rate of 4 percent this year and in October 2024, CPI breached RBI’s upper limit of 6 percent, recording a growth of 6.21 percent. High food prices, especially the skyrocketing vegetable prices with double-digit inflation and at 42.18 percent in October 2024, are concerning as they influenced consumers spending adversely. The persistent rise in food prices affect even the core prices, which are edging up gradually. Despite the RBI keeping policy rates constant at 6.5 percent since February 2023, inflation has continued to be a problem with temporary reliefs intermittently.
Today, the Centre and states spend more than Rs 9,00,000 crore in subsidies for the bottom 60%, of the population. This gives politicians a good leverage in a democracy like India but kills the goose that lays golden eggs. The middle class bears the brunt of taxes and has little to spend.
The less consumption power of people gets confirmed with low GST collection in Dec2024 compared toNov 2024, there was a decline of 3%in December.Less demand has compelled companies to freeze wage rates,low employment and high taxes have left people with little to spend.
The disposable income with the consumers was also low because of low capital expenditure by government, while budget allocated 11.11 lakh crore for capex,only 5.3 lakh crore have been spent by Nov. 2024 which stands at 12 percent lower than the corresponding period last year.All these factors lead to the contraction in domestic demand of the goods. The escalation of domestic demand stands as a big challenge for the budget 2025-26.
On Supply side the consistent improvement in bank balance sheets over the past couple of years and the fall in non-performing assets across sectors have increased bank willingness to lend more and corporates are ready to leverage opportunities if demand for things picks up.
The challenges with the finance minister on the one side is to arrest the economic slowdown,maintain growth rate at a higher level and on the other she has to be vigilant on prices and social welfare. Balanced approach is required in fiscal consolidation with strategic investment in manufacturing, by simplifying regulatory framework, furthering the ease of doing business – will stimulate domestic and international investments, skill development in new areas like AI, innovation,simplifying GST slabs for ease of compliance etc. In order to escalate domestic demand middle class shall get tax relief, jobs need to be created, capex on vital sectors need to be undertaken to invigorate private investments, investment in infrastructure development incentives could boost consumption and investment driving economic momentum. In short job centric projects need to be taken up. The demand will increase with an escalation in domestic consumption which depends upon the disposable income with people, which in turn depends upon inflation, employment and taxes etc.
People want jobs and more employment opportunities will give them money to buy the things and its impact on wage rates will be positive.In order to create more jobs stress should be laid on MSME sector as it bears a high capacity to create more jobs at low investment. It may not be out of way to mention here that Credit to the MSME sector saw strong growth in Quarter 2 of FY 2025, with micro and small enterprises increasing by 13.4 percent and medium enterprises by 20.5 percent. This suggests that the MSME sector is increasing its investment to expand. This sector has a big potential to employ people.
Infrastructure sector being labour intensive too can go along way in escalating the demand for goods. It will also help the government to fulfil the basic requirement for sustainable industrial growth of the country.
The other important sectors to create more jobs can be agriculture and tourism. Agro -based industries and integrated farming need to be encouraged, new tourist destinations should be marketed and upgrading of facilities at the existing sites can go a long way in employment generation and may thereby help to escalate the demand.
The high economic growth rate is good only when it creates more jobs otherwise it leads to economic disparity and results ultimately in the concentration of wealth in a few hands which can be more fatal for the society.
(The author is Professor at Guru Gobind Singh Indraprastha University, Delhi)
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