India's Economic Situation and Growth Prospects
The recent GDP data indicates that India's economy is on a recovery trajectory, with growth increasing from 5.6% in July-September to 6.2% in October-December, and an estimated 7.6% in January-March. However, significant weaknesses remain, requiring substantial policy work.
Investment Concerns
- Real investment is projected to grow by only 6% in 2024-25, lower than the 15% annual growth during the 2004-2007 boom.
- Investment's share of GDP has declined from 40% during the boom to 33% now.
Growth Trends and Challenges
- For 2024-25, growth is expected at 6.5%, below the post-COVID 8.8% average.
- High-frequency indicators show signs of economic slowdown, including reduced retail sales and declining credit growth.
Historical Context
Before COVID-19, growth had fallen below 4%, with the unorganised sector hit by demonetisation and GST issues, and the organised sector struggling with past borrowings.
Factors Driving Post-COVID Recovery
- Normalisation of activity: Return to work and increased household spending post-lockdown.
- Government infrastructure spending: Averaged 30% growth between 2021-22 and 2023-24.
- New Economy: Global Capability Centres (GCCs) boosted service exports by 65%, fuelling the auto and construction sectors.
Slowing Growth
- The temporary boost from the economy's reopening has waned.
- Infrastructure spending has been reduced due to fiscal constraints.
- Service export growth slowed as GCC expansion leveled off.
Structural Issues
- India's long-term growth rate averages around 6%, inadequate for meeting national needs.
- Labour force participation is low, with only 420-430 million of 1.1 billion working-age people in the labour force.
- Nominal wage growth is stagnant, impacting middle-class Indians, with average inflation at 5% eroding real wages.
International Comparisons
- India's progress in improving living standards has been slow despite climbing international rankings.
- In terms of real GDP per capita, India ranked 142nd in 1980, improving to 109th by 2022.
Conclusion
The focus should be on developing a strategy to accelerate growth by addressing deep structural issues, ensuring sustainable economic progress.