Thus, the economy is expected to grow by around 7% in 2024-25 on top of 7% and 8.2% in 2022-23 and 2023-24 respectively. India is back on the high growth path that prevailed before growth decelerated from 2017-18 onwards due to repeated shocks culminating in a sharp contraction in 2020-21 on account of the covid pandemic.
However, there has been some growth moderation in the first quarter of 2024-25 due to a large trade deficit and also contraction in government consumption on account of restrictions under the election code-of-conduct.
On the supply side, there has been a contraction in mining and electricity and a slowdown in construction, capital goods, consumer durables, tourism, travel and financial services.
Headline inflation fell below the 4% target in August but has increased again in September due to high inflation of food prices. NIPFP’s annual inflation forecast at 4.3% is marginally lower than the Reserve Bank of India (RBI) forecast of 4.5%. The upside risk factors include persistent high food price inflation and a rebound of core inflation.
India’s high growth performance has prevailed despite a very fragile external environment. Not surprisingly, the country is often described as the world’s fastest growing major economy. However, a large goods trade deficit more than offsets a substantial trade surplus in services, thus leading to a large net trade deficit.
Notwithstanding a net outflow in September 2024, large financial inflows on the external account have raised India’s stock of foreign exchange reserves to around $700 billion.
Despite this, largely thanks to RBI interventions, the exchange rate has not appreciated. The nominal exchange rate has remained almost flat and the real effective exchange rate even depreciated a little in August and September.
On the monetary policy front, following a massive expansionary stance to help the post-pandemic recovery, RBI switched to a “withdrawal of accommodation” stance in June 2022 while raising the policy rate by 250 basis points to 6.5% between May 2022 and February 2023.
This helped bring down the inflation rate, which had been hovering above RBI’s 6% upper limit, within its tolerance band and eventually down to its 4% target in August 2024, though it has inched up again in September as noted earlier. The repo rate has been retained at 6.5%, but earlier this month, the central bank changed its stance to neutral.
As a consequence of these policies, along with active liquidity management, the repo rate, call rate and all sovereign bond yields across maturities have converged between 6.5% and 7%.
Corporate bond yields have also converged across maturities at under 8%, pricing in the risk margin above sovereign bonds. RBI has also raised the risk weight on personal loans and loans to services, thereby curbing their exuberant growth.
As a result, credit growth has slowed and the credit-deposit gap, which has been causing concern, has also narrowed. But deposit growth still trails credit growth, presumably because of low interest rates on bank deposits.
On the fiscal front, consolidation is well on track. Most tax revenues have been buoyant, barring excise and customs duties, as duty rates have been lowered. Fortunately, ad hoc increases in customs duties seen in recent budgets were largely absent this year.
Buoyant tax revenues, together with a large increase in non-tax revenues (mainly due to a substantial transfer of RBI’s surplus) and compression of revenue expenditure, have enabled the central government to budget a large reduction in the fiscal deficit to 4.9% of GDP, despite a planned 17% increase in capital expenditure.
Barring some outlier states, fiscal consolidation has also progressed well for most states, mainly on account of their own tax revenues, with their average fiscal deficit at 3.1%, which is close to the 3% target.
The debt-to-GDP ratios of the states, the Centre and all combined at 27.4%, 55.7% and 80.2% respectively, are also all well within the limits prescribed by the 15th Finance Commission.
High inequality and tardy employment growth have been the two weak features of the Indian growth story, the latter mainly attributable to poor conditions of informal employment, which accounts for around 90% of total employment.
But even here, data from the latest quarterly urban Periodic Labour Force Survey (PLFS), by ‘current weekly status,’ points to some mild improvement. The overall labour participation rate (LFPR) rose from 49.9% in October-December 2023 to 50.2% and 50.1% respectively in January-March and April-June 2024.
Similarly, the employment rate, or workforce participation rate (WPR), improved from 46.6% in October-December 2023 to 46.9% and 46.8% in January-March and April-June 2024 respectively.
However, this marginal overall improvement conceals the fact that the LFPR and WPR for women both declined slightly in April-June 2024. Moreover, these aggregate numbers do not reveal the ongoing dynamics of a very complex labour market.
Especially so because the PLFS uses a very loose definition of ‘usual status’ employment under which anyone would be treated as employed if s/he was employed for just 30 days in the preceding year, even if s/he was unemployed during the remaining 11 months.
Broadly, though, the economy has done well.
