STATE OF THE ECONOMY: GETTING BACK INTO THE FAST LANE
The global economy in 2024 exhibited steady but uneven growth, driven by contrasting sectoral performances and geopolitical pressures. Manufacturing output slowed globally, particularly in Europe and parts of Asia, due to supply chain disruptions and weak external demand.
However, the services sector thrived, providing resilience to many economies. Inflationary pressures eased somewhat, though risks of price synchronization remain, particularly in commodities. Amid these global trends, India’s economy demonstrated steady growth, with a projected real GDP expansion of 6.4% in FY25. Key drivers included strong agricultural output and robust services growth, while manufacturing faced challenges linked to global conditions.
The Economic Survey of 2024-25 outlines India’s macroeconomic position in a dynamic global environment. This chapter reviews the global economic scenario, domestic economic developments, and future growth prospects. It emphasizes India’s steady recovery from the pandemic, sectoral performances, and resilience amid external uncertainties. Fiscal discipline, agricultural stability, and rising consumption have provided a solid foundation for growth.
Indian Economy at a glance
Category | Data | Comments |
Projected Real GDP Growth | 6.40% | Indicates steady growth supported by key sectors. |
Sectoral Growth | ||
– Agriculture | Record Kharif production | Boosted by improved monsoons and reservoir levels. |
– Industry | Slowdown in Q2 | Due to weak exports but offset by strong construction growth. |
– Services | 7.1% growth | Driven by financial, real estate, hospitality, and IT sectors. |
Private Consumption | PFCE increased | Growth driven by rural demand and improved tractor sales. |
Investment (GFCF) | 6.4% growth | Affected by delays in capital expenditure during election periods. |
Inflation | 4.90% | Retail inflation softened though food prices remain volatile. |
– Food Prices | Volatile | Caused by weather and supply chain issues. |
Current Account Deficit (CAD) | 1.2% of GDP | Balanced by strong services trade surplus and remittances. |
Fiscal Trends | ||
– Revenue Expenditure Growth | 12% | Driven by higher subsidies and committed liabilities. |
– Capital Expenditure Trends | Mixed | Growth observed in power and transportation sectors. |
Monetary Policy | Stable | RBI focuses on balancing inflation control and growth. |
Bond Yields | Mixed trends | Yields on advanced economy bonds rose due to renewed inflation uncertainty; Indian yields remained steady. |
Capacity Utilization | 74.70% | Above long-term average, indicating stronger manufacturing. |
Corporate Investment | 23.6% rise in capital goods orders | Driven by infrastructure projects and improving investment climate. |
External Challenges | ||
– Geopolitical Risks | High | Disruptions due to Russia-Ukraine and Middle East tensions. |
– Trade Uncertainty | High | Suez Canal disruptions increased freight rates and uncertainties. |
Services Sector Resilience | PMI expansion | Supported by high performance in hospitality and IT sectors. |
External Sector Stability | ||
– Merchandise Export Growth | 1.60% | Modest growth due to weak petroleum goods trade. |
– Non-petroleum Export Growth | 7.10% | Boosted India’s global services trade rank to seventh. |
– Import Growth | 5.20% | Driven by demand for non-oil, non-gold, and gold imports. |
– Remittances | Record high – $129 billion | Supported by job creation in OECD nations, strengthening CAD. |
– Services Trade | Surplus | Propelled external stability alongside remittance inflows. |
Fiscal Trends | ||
– Revenue Expenditure Growth | 12% | Driven by higher subsidies and committed liabilities. |
– Capital Expenditure Trends | Mixed | Growth observed in power and transportation sectors. |
Global Economic Scenario
- Growth Dynamics: The global economy grew by 3.3% in 2023, with a similar projection for 2024 and 2025. Advanced economies (AEs) experienced stable growth due to moderate inflation and sustained consumption. However, regional disparities emerged, with the United States maintaining strong growth, while Europe’s growth lagged due to manufacturing weakness. In Asia, Japan faced domestic supply disruptions, and China struggled with weak consumption and real estate issues.
- Sectoral Trends
- Manufacturing: The global manufacturing sector experienced fluctuations, contracting during parts of the year due to weak demand and supply chain disruptions.
- Services: The services sector maintained strong growth, with a global Services PMI indicating sustained expansion for over 23 consecutive months.
- Inflation Trends: Inflation eased globally due to tighter monetary policies and supply chain adaptations. However, services inflation remained persistent, influenced by higher wage growth. The risk of synchronized price pressures remains a concern, particularly in commodities affected by geopolitical tensions.
- Geopolitical Risks: Conflicts such as the Russia-Ukraine war and tensions in the Middle East impacted global trade and energy security. Disruptions in key shipping routes, including the Suez Canal, led to higher freight rates and trade uncertainties.
- Monetary Policy Shifts: Central banks globally began easing monetary policies due to declining inflation. However, uncertainty over long-term policy rates persists, driven by differing economic trajectories across regions.
- Bond yields:
- Advanced Economies (AEs):
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- Initial decline in sovereign bond yields was observed from April to September 2024, driven by reduced inflation and monetary policy easing.
- Renewed uncertainty in global markets during the final quarter (October–December 2024) pushed bond yields higher. Factors include persistent concerns over inflationary pressures and monetary policy directions.
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- United States: Long-term policy expectations remain uncertain, as evidenced by a broader variance in Federal Reserve Open Market Committee (FOMC) assessments regarding future terminal interest rates.
- China: Bond yields showed a declining trend, reflecting lower growth prospects and deflationary pressures. This has widened the yield spread between U.S. and Chinese bonds, signaling differing economic conditions in the world’s two largest economies.
- Emerging Market Economies (EMEs): Bond yields in countries like India remained relatively stable. The overall trend in EMEs reflects improved fiscal management, with reduced inflation risks contributing to stable debt markets.
India’s Domestic Economic Performance
- GDP and Sectoral Growth: India’s real GDP is projected to grow by 6.4% in FY25, driven by robust agricultural output and services.
- Agriculture: Growth is supported by record Kharif production, improved monsoons, and strong reservoir levels.
- Industry: The industrial sector faced a slowdown in Q2 FY25 due to weak manufacturing exports and seasonal factors but showed resilience in construction and utilities.
- Services: The services sector grew by 7.1% in H1 FY25, driven by financial, real estate, and professional services, alongside improvements in hospitality and IT.
- Consumption and Investment
- Private Consumption: Private Final Consumption Expenditure (PFCE) increased, particularly in rural areas, supported by improved agricultural incomes and tractor sales.
- Investment: Gross Fixed Capital Formation (GFCF) grew by 6.4% in H1 FY25 but moderated due to delayed capital expenditure during election periods. Signs of recovery in investment are visible through increased order books and capacity utilization.
- Inflation and External Stability
- External Sector Stability: India’s external sector-maintained stability in FY25 due to a strong services trade surplus and record remittances. Merchandise exports grew modestly at 1.6% due to weak petroleum goods trade, while non-petroleum exports rose by 7.1%.
- Imports increased by 5.2%, driven by demand for non-oil, non-gold items and higher gold imports. Services exports propelled India to rank seventh globally in services trade.
- Record remittances, influenced by job creation in OECD nations, further strengthened India’s external position, keeping the current account deficit (CAD) at a manageable 1.2% of GDP.
- Non-petroleum exports grew 7.1%.
- CAD remained low at 1.2% of GDP.
- Financial Sector Prospects The financial sector in India witnessed mixed trends with moderation in credit disbursal growth in H1 FY25.
- Banking sector credit showed slower expansion as corporate borrowing demand softened after a strong rebound in previous quarters.
- However, retail loans, particularly in housing and vehicle segments, continued to grow.
- Policy rate cuts and inflation easing provided opportunities for reduced borrowing costs.
- Lower borrowing costs were supported by easing inflation.
- Business sentiment points to an investment-driven rebound in H2 FY25.
- Employment Trends: Employment trends showed improvement in FY25, supported by sectoral growth and a recovery in contact-intensive industries.
- The services sector, including hospitality, tourism, and IT, drove job creation.
- Agriculture provided seasonal employment due to record Kharif production.
- However, the manufacturing sector faced challenges from global demand slowdown, affecting job prospects.
- High-frequency indicators showed increased formal employment registrations under schemes like EPFO.
- Additionally, corporate surveys reported moderate hiring, with employers adopting a cautious hiring approach due to global uncertainties.
- Rural employment benefited from infrastructure and construction activities under government programs.
Fiscal and Monetary Developments
- Fiscal Management: India’s fiscal discipline improved with enhanced capital expenditure by the Union government. Tax revenue growth enabled greater devolution to states, supporting their expenditures. State finances displayed varying trends, with some states achieving revenue surpluses and strong capital outlays.
- Public Expenditure Trends
- Revenue expenditure grew by 12% during April-November 2024, driven by higher subsidies and committed liabilities.
- Capital expenditure showed mixed results, with growth in sectors such as power and transportation.
- Monetary Policy: The Reserve Bank of India (RBI) maintained a balanced approach, focusing on controlling inflation while supporting growth through stable monetary conditions. Industrial outlook surveys indicated improving demand conditions and business expectations.
- Industrial Recovery Outlook: Recent reports highlight increased capacity utilization, with seasonally adjusted manufacturing activity rising to 74.7%. Corporate investment sentiments improved with a 23.6% rise in capital goods orders, showing promise for stronger capital formation in FY26. Increased government spending on infrastructure, particularly in sectors like railways and defense, supports this trend.
Emerging Challenges and Growth Prospects
- External Headwinds: Global uncertainties, including geopolitical risks and trade policy shifts, could impact India’s growth trajectory. Persistent risks in global commodity markets and potential disruptions to energy supplies remain key concerns.
- Structural Reforms: To sustain medium-term growth, India needs to enhance its global competitiveness through structural reforms, including deregulation and infrastructure development. Key focus areas include improving ease of doing business, labor market reforms, and investments in technology and education.
- Positive Indicators: Despite global challenges, India’s economic outlook remains favorable due to strong domestic demand, fiscal stability, and continued progress in key sectors. The rebound in agricultural output and steady services growth provide optimism for FY26. Additional support from global remittance inflows and a trade surplus in services indicates strong external stability.
- Investment Trends: Increasing private investment intentions and government-backed infrastructure projects indicate a positive trend for capital growth. Industrial firms report strong demand conditions, reflecting optimism for both short-term and long-term business growth.
Conclusion
India’s economic performance in FY25 reflects resilience and adaptability amid a complex global environment. Strong agricultural and services growth, supported by stable macroeconomic fundamentals, has positioned the country for sustained expansion. However, challenges related to global trade, geopolitical tensions, and inflationary pressures require continued vigilance and strategic policy responses.