India's Economic Slowdown
India, once one of the world’s fastest-growing major economies, is facing a significant economic slowdown. The GDP expanded by only 6.1% in April-December FY25, down from 9.5% in the same period the previous year. Inflation remains above the Reserve Bank of India’s (RBI’s) target, and foreign investors are withdrawing amidst market jitters.
Global and Domestic Factors
- The slowdown is attributed to domestic factors despite a stable global economy.
- Global growth is projected to be resilient, with the US surpassing expectations.
- The Indian stock market has experienced a decline of over 10% since September 2024.
Structural Challenges and Policy Missteps
- The economic slump is due to structural challenges and policy missteps.
- Fiscal and monetary policies have been tightened simultaneously, exacerbating the slowdown.
- Capital expenditure contracted by 15% in the first half of FY25.
- RBI's exchange rate strategy has led to forex interventions, tightening liquidity, and raising interest rates.
Corrective Measures and Long-term Issues
- The RBI has eased exchange rate controls and injected liquidity.
- The February Budget provided tax relief to stimulate demand.
- Long-term issues include the collapse of private investment and exports post-2008 financial crisis.
Export-Led Growth Potential
- India’s share in global manufacturing exports remains below 2%.
- Opportunities arise from China's retreat from low-skill exports and US tariffs on Chinese goods.
- Inward-looking trade policies and increased tariffs have hurt competitiveness.
Investment Climate and FDI
- FDI is crucial for export growth but is declining due to protectionism and regulatory uncertainty.
- India may have lost up to 60% of potential FDI due to policy gaps.
Way Forward
- India needs an outward-looking trade strategy and a stable business environment.
- Protectionist barriers must be reduced and FDI actively encouraged.
- Exports should become a central priority for sustained growth.