An economic tightrope 

(Source: Indian Express; Section: The Ideas Page; Page: 13)

 India in 2025: A Year of Economic Milestones and Challenges

• The year 2025 is poised to be transformative for the Indian economy, with the possibility of India surpassing Japan to become the fourth-largest global economy.
• This milestone would underscore India’s growing economic significance, providing a larger market and investment opportunities, increasing government resources, and enhancing its geopolitical stature.
• However, challenges loom, including slowing growth, fiscal constraints, and global economic volatility.

Slowing Growth Momentum: A Cause for Concern

• India’s nominal GDP growth may remain below 10% for three consecutive years, signaling a departure from its decadal average of 11%.
• This slowdown could adversely impact household incomes, employment, and the government’s debt-deficit dynamics.
• If this becomes a sustained trend, it could weaken India’s trajectory toward becoming a developed nation, highlighting the need for structural reforms to reinvigorate growth.

Evaluating the Production-Linked Incentive (PLI) Scheme

• The PLI scheme, a centerpiece of India’s industrial policy, has achieved mixed results.
• Despite allocations of ₹32,620 crore over four years, disbursements remain concentrated in a few sectors like mobile phones and semiconductors, while others receive negligible support.
• This narrow focus raises concerns about whether the scheme is effectively boosting investments and creating jobs across industries.
• A broader approach involving a larger set of companies is necessary to drive the investment cycle and diversify industrial growth.

The Role of Private Sector Investments

• Government capital expenditure has played a significant role in supporting the economy, but its sustainability is in question, with the capex-to-GDP ratio likely having peaked.
• A contractionary fiscal policy, driven by fiscal deficit reduction targets, puts additional pressure on private investments to take the lead.
• However, past strategies to encourage private investment have yielded limited success, and relying on hope for private sector participation is insufficient.

Trade Policy: Balancing Protectionism and Global Integration

• India’s approach to trade agreements remains inconsistent, with a mix of protectionist policies and selective engagement in free trade agreements (FTAs).
• While FTAs with the UK and EU hold potential, delays and hesitancy have hindered progress.
• Other nations have capitalized on the China-plus-one strategy more effectively.
• For sustained growth, India must strike a balance between protecting domestic industries and integrating with global trade networks.

Fiscal and Monetary Challenges

• India faces significant fiscal pressures with the 16th Finance Commission’s recommendations and the impending Eighth Pay Commission’s salary revisions.
• These will strain both central and state finances, complicating fiscal consolidation efforts.
• Simultaneously, the Reserve Bank of India (RBI) is under pressure to manage inflation, interest rates, and currency stability amidst global volatility. Balancing fiscal discipline with growth-supportive policies will be crucial.

Global and Domestic Uncertainties

• Uncertainty in global trade and financial markets, exacerbated by potential US protectionist policies and rising interest rates, adds complexity to India’s economic landscape.
• Domestically, a less hectic election calendar in 2025 may provide the government with an opportunity to focus on long-term policies rather than short-term optics.

Conclusion: The Path Ahead

• While 2025 offers India a chance to solidify its economic standing, achieving sustained growth requires addressing structural bottlenecks, enhancing private investments, adopting a consistent trade policy, and managing fiscal challenges.
• The government must leverage this pivotal year to implement reforms that ensure inclusive and resilient economic progress amidst a challenging global environment.