Editorial: Temper expectations

Though IMF projects a positive picture of India’s economic future, growing unemployment, inflation are big concerns

Despite uncertainties in the global economic market, India has shown remarkable resilience, registering healthy growth. However, growing unemployment, inflation and sluggish private investment and consumption are the areas of concern. The latest report of the Indian Monetary Fund (IMF), increasing the GDP growth estimate for 2024-25 to 6.5%, demonstrates India’s strong economic fundamentals. There is no room for complacency as global factors such as a sharp slowdown or supply disruptions could impact India through trade and financial channels. Domestically, weather shocks pose a potential threat to inflation. With subdued consumer demand contributing to the private sector’s unwillingness to invest, there is going to be increased pressure on the Centre to keep spending big. Overall, the IMF projections paint a positive picture of the country’s economic future and a resilient domestic demand, though slightly below the government’s expectations. The Finance Ministry had last month predicted that the growth rate may be close to 7% in 2024–2025. Global inflation, according to the IMF, will ease from 6.8% in 2023 to 5.8% in 2024 and 4.4% in 2025. The multilateral body gave a ringing endorsement of India’s growth story, commending its robust economic growth, resilient financial sector, and notable progress in formalisation and digital infrastructure. A recent paper, published by the RBI, highlighted the scope of sustained economic growth but also cautioned on inflation which can stymie growth. However, as inflation eases, a revival of topline growth is expected to support the manufacturing expansion. Among services, construction activity remains robust, boosted by housing demand. Other categories of services are normalising from the post-pandemic revenge spending, but underlying momentum remains resilient.

If inflation is not kept under check, the pace of economic growth may falter. The Indian economy averaged 7.7% growth in the first two-quarters of the fiscal due to strong consumption demand and rising investment. Further liberalisation of foreign investment could increase India’s role in global value chains, boosting exports. Implementation of labour market reforms could help raise employment and growth. While it is largely believed that the country’s economy could grow at a faster pace than expected, such optimism must be tempered with the harsh ground realities in the form of resurging inflation and growing unemployment. To ensure continued robust and sustainable growth, a strategic approach encompassing fiscal, monetary, trade, industrial and institutional policies is crucial. Policymakers must be guarded against possible headwinds that could slow down the pace. Widening current account deficit, soaring inflation and heightened geopolitical tensions would be the major headwinds in the immediate future. On the productivity front, India is not making the desired progress to make its growth sustainable over time. There is a need to accord top priority to the development of key sectors that have high potential for growth, employment and innovation, such as manufacturing, services, agriculture, and renewable energy.