Key Government Initiatives in January 2025

Prime Minister Narendra Modi has announced and launched several transformative initiatives, demonstrating a vision for a progressive and self-reliant India. These initiatives span across various sectors, setting a dynamic tone for the year 2025.

SVAMITVA Scheme

• Distribution of over 6.5 million property cards to property owners in 50,000 villages.
• Aim: To provide ownership rights and enhance rural infrastructure.

8th Pay Commission and Space Initiatives

• Approval for the establishment of the 8th Pay Commission.
• ISRO's success with the Space Docking Experiment (SpaDeX).
• Approval for a third launch pad at Sriharikota with an investment of Rs 3,984 crore.

Infrastructure and Welfare Programs

• Extension of a special package for Di-Ammonium Phosphate (DAP) to keep fertiliser prices affordable.
• Distribution of newly constructed flats under the In-Situ Slum Rehabilitation Project in Delhi.
• Foundation laying for educational projects worth over Rs 600 crore.

Rural Development and Economic Initiatives

• Grameen Bharat Mahotsav to promote GI-certified village products.
• Meeting with global tech leaders to foster indigenous innovation, including a $3 billion AI investment by Microsoft.
• Infrastructure advancements including the Namo Bharat Train Corridor and rail projects in several states.

Healthcare and Science Projects

• Launch of the Genome India Project to map genetic diversity.

Youth and Cultural Engagement

• Participation in the Viksit Bharat Young Leaders Dialogue.
• Addressed the Pravasi Bharatiya Divas convention.

Defence and Security Enhancements

• Inauguration of the Sonamarg Tunnel for improved connectivity and national security.
• Commissioning of advanced naval combatants to bolster India's maritime strength.

Prime Minister Modi emphasized the role of these initiatives in shaping a developed India and highlighted the importance of each citizen in building a prosperous future.

Macroeconomic Policymaking Challenges in India (2025)

Macroeconomic policymaking in India faces significant challenges due to external economic pressures and internal growth dynamics. The complex global and domestic economic landscape requires India to navigate carefully to sustain growth and stability.

External Economic Pressures

• American Exceptionalism:
  • Resilient growth in the US has tightened global financial conditions.
  • US Federal Reserve's reduced rate cuts expectations have led to increased bond yields and a strong dollar.
  • These changes put pressure on emerging-market currencies, including the rupee.
• Trump 2.0 Risks:
  • US tariffs increase global uncertainties, depressing capex and growth.
  • Potential redirection of Chinese excess capacity to countries like India.
  • Trade wars could result in weaker global growth but a stronger US economy.

Domestic Growth Dynamics

• Slowing Growth Momentum:
  • Urban consumption has diminished as pandemic savings exhaust and lending tightens.
  • Rural consumption is rising but at a gradual pace.
  • Private investment is cautious, awaiting better demand visibility.

Policy Response and Strategy

Monetary Policy

• Interest Rate Strategy:
  • Avoid using interest rates solely to defend the rupee.
  • Focus on domestic growth and inflation dynamics.
  • Use FX reserves to manage exchange rate adjustments.
• Inflation Management:
  • Food prices show relief, aiding inflation control.
  • Core inflation remains moderate, indicating economic slack.

Fiscal Policy

• Debt and Deficit Management:
  • Public debt/GDP is rising due to slow GDP growth.
  • Gradual fiscal consolidation is essential to avoid pro-cyclicality.

Opportunities and Reforms

Structural Reforms

• Labour-Intensive Growth:
  • Focus on accelerating growth through structural reforms.
  • Enhance the economy's external attractiveness amid global trade shifts.

Strategic Positioning

• US-China Trade War:
  • Position India as an attractive alternative for global firms.
  • Utilize the current government's political capital to push for reforms.

Overall, India must balance domestic policy adjustments with global economic dynamics, seizing the opportunity for reforms and growth amidst external challenges.

RBI Liberalizes Norms for Cross-Border Transactions

The Reserve Bank of India (RBI) announced new liberalized norms on January 16, 2025, aimed at promoting the use of the Indian Rupee and other local currencies for settling cross-border transactions. This move comes amidst the depreciation of the domestic currency, which recently hit a record low of 86.70 per USD.

Key Initiatives

• Memorandum of Understanding (MoU): The RBI has signed MoUs with the central banks of the United Arab Emirates, Indonesia, and Maldives to facilitate cross-border transactions using local currencies, including the Indian Rupee.
• Special Rupee Vostro Account (SRVA): Introduced in July 2022, this arrangement has led to the opening of several SRVAs by foreign banks with Indian banks, enhancing the use of INR for trade transactions.
• Liberalized FEMA Regulations:
  • Overseas branches of Authorized Dealer banks can open INR accounts for non-residents for settling permissible transactions with Indian residents.
  • Non-residents can settle transactions with other non-residents using balances in repatriable INR accounts like SRVA and Special Non-resident Rupee accounts.
  • Balances in these accounts can also be used for foreign investment, including Foreign Direct Investment (FDI), in non-debt instruments.
• Facilitation for Indian Exporters: They can open accounts in any foreign currency overseas to settle trade transactions, receive export proceeds, and pay for imports using these proceeds.

Background

This initiative follows a review of the extant FEMA regulations of 1999 by the RBI, conducted in consultation with the central government, to promote cross-border transactions in INR and local/national currencies.

Global Economic Prospects and India's Growth

The World Bank's latest Global Economic Prospects (GEP) report highlights key growth forecasts for India and the global economy, emphasizing India's position as the fastest-growing major economy.

India's Economic Growth

• Growth Projections: India is projected to grow at a rate of 6.7% in both FY26 and FY27.
• Sectoral Insights:
  • The services sector is expected to maintain robust growth.
  • Manufacturing is likely to strengthen due to improvements in logistics infrastructure and tax reforms.
• Private Consumption: Predicted to increase due to a stronger labor market, expanding credit, and declining inflation, though urban consumption has been constrained by higher inflation and slower credit growth.
• Investment Growth: Supported by rising private investment, strong corporate balance sheets, and easing financing conditions.

Global Economic Outlook

• World Economic Growth: Projected to expand by 2.7% in 2025 and 2026, mirroring the pace of 2024 due to declining inflation and interest rates.
• South Asian Region: GDP growth is expected to reach 6.2% in 2025 and 2026, driven by India’s performance.
• Developing Economies:
  • Account for 60% of global growth but face the weakest long-term growth outlook since 2000.
  • Progress in catching up with advanced economies is expected to be slower.

Trends in Global Economic Integration

• Foreign Direct Investment (FDI): As a share of GDP, FDI flows to developing economies have halved compared to the early 2000s.
• Trade Restrictions: New global trade restrictions in 2024 are five times the 2010-19 average.
• Long-term Growth Trends: Overall global economic growth has decreased from 5.9% in the 2000s to 3.5% in the 2020s.

Key Observations

• Since 2014, developing economies, excluding China and India, have experienced lower per capita income growth compared to wealthy economies, widening the income gap.
• According to the World Bank, the next 25 years may present more challenges for developing economies compared to the past 25 years.

Impact of Rupee Depreciation on India

The depreciation of the Indian rupee is a cause for concern among policymakers, despite the notion of national pride associated with a strong currency. Ideally, a weaker rupee should benefit India by enhancing its exports' competitiveness and reducing import dependence.

Economic Implications

• Exports and Imports:
  • Cheaper exports increase competitiveness in foreign and domestic markets.
  • Costlier imports theoretically reduce competition from foreign goods.
• Strategic Advantage: Several countries, notably China, have used currency undervaluation to gain a competitive edge in manufacturing.

Challenges

• Trade Deficits: Historical export pessimism and declining manufacturing have left India as a net importer, leading to significant trade deficits.
• Import Nature: High oil import costs are a major challenge, making up 20% of imports and affecting inflation and trade balance.
• Foreign Exchange Reserves: The RBI can defend the rupee using reserves but at the cost of liquidity, impacting growth.

Strategies for Improvement

• Reducing Import Dependence:
  • Enhance domestic production of natural resources like oil and minerals.
  • Consider incentives similar to PLI for resources.
• Shift to Renewable Energy (RE): Reduce oil dependence by increasing RE capacity, especially in oil-intensive sectors like transportation.

Conclusion

A depreciating rupee, accompanied by strategic policies, can potentially transform India into a net exporting nation, contributing positively to its economic trajectory.

Foreign Currency Non-Resident (Bank) Deposits

The United Arab Emirates (UAE) and the United States (US) play a significant role in the FCNR (B) deposits mobilized by Indian banks, indicating a strong Indian banking presence in the Gulf region.

Key Statistics

• As of September 2024, the UAE accounted for 43% of the FCNR (B) deposits, up from 39% in March 2020.
• The share of the US decreased from 17% to 10.6% during the same period.

Reasons for UAE's Higher Share

Soumitra Sen, country head of consumer banking at IndusInd Bank, explains that Indian banks have a higher presence in the GCC, particularly the UAE, through representative offices and offshore branches, leading to a greater share of non-resident FCNR deposits from these regions.

Comparison with Other Countries

• The UK holds a 5.5% share of FCNR (B) deposits.
• Singapore accounts for 5%.

Lower US Share Explanation

Higher interest rates and bond yields in the US provide NRIs with more lucrative investment opportunities, reducing the appeal of FCNR (B) deposits.

GCC-based NRI Client Preferences

• NRIs see safety and higher returns in India compared to their country of residence.
• FCNR inflows grew faster due to the strength of the Indian economy and banking sector.

Nature of NRI Deposits

Unlike remittances for family maintenance or non-repatriable transfers, NRI deposits serve as savings and investment instruments and are repatriable.

RBI's Strategic Move

The Reserve Bank of India recently relaxed interest caps on FCNR (B) deposits, aiming for long-term growth rather than immediate impacts amidst volatile markets.