In 2025, the hurdles to India’s growth

Size does bring with it significant advantages. A larger economy offers a bigger market and more investment opportunities for the private sector. It will also generate more resources for the government, which, if the political class so chooses, can be effectively deployed to build the foundations of a developed nation. A $4 trillion-odd economy will also add to the country’s growing heft in geopolitical matters.

At the same time, there is also the very real possibility of the economy growing at less than 10 per cent in nominal terms for two consecutive years. This does not seem to be a temporary loss of momentum. As per a recent report, the upcoming budget may project a nominal growth of less than 10 per cent for the next year as well. That would make it three years in a row. If the economy settles into a lower growth trajectory — down from its decadal average of roughly 11 per cent — it will not only have implications for household incomes, employment and redistribution but also for the government’s debt-deficit dynamics.

The big unknown for India, and the global economy, is what will happen after January 20 when Donald Trump is sworn in as US President. Trump has already stated his intention of imposing tariffs on Canada, Mexico and China. While this could well be a negotiating tactic, a period of volatility is likely to ensue.

This volatility, coupled with the likelihood of higher interest rates in the US and a strong dollar, will continue to test RBI’s defence of the currency. With inflation moderating, the central bank will also be under pressure to cut interest rates to arrest flagging growth. However, rate cuts will put further pressure on the rupee. So far, the RBI has been trying to hold the line on both interest rates and the currency. But something has to give. It must be asked: Who should determine the level of the currency — the market or the central bank? And with growth slowing, how long can monetary policy be restrictive when the government is expected to continue on the path of fiscal consolidation?

As per the glide path announced in the Union budget, the fiscal deficit will fall from 4.9 per cent of GDP this year to 4.5 per cent next year. This implies a contractionary fiscal impulse to the economy. With government capital spending unlikely to sustain the momentum — its capex to GDP ratio has likely peaked — the question is: Will the private sector finally pick up the investment baton? None of the fiscal levers used so far have helped. So what makes one believe that the private sector will now step up? Hope is not a strategy.

Now may be an appropriate time to examine the efficacy of the production-linked incentive scheme — an integral part of this government’s industrial policy. As per data from ICRA, between 2021-22 and 2023-24 (RE), only Rs 11,535 crore was disbursed under the PLI and the subsequent design scheme. Another Rs 21,086 crore has been budgeted for this year, bringing the total to around Rs 32,620 crore over four years. But, of the 13 industry segments, data shows that roughly a third of the entire amount is being disbursed to one segment — mobile phones. Another quarter is allocated to the semiconductor segment. This implies that for most of the remaining sectors, disbursements are almost negligible.

Alongside, the unstated strategy that centres on extending either explicit or implicit support to a few national champions, bringing down the risks they are exposed to, also needs to be re-examined. As the last few years have shown, this is a flawed approach — in a globalised world, risks cannot be fully neutralised and the fluctuating fortunes of these big groups will adversely impact their investment commitments. Such a strategy is unlikely to move the needle significantly on investments and jobs. A much larger set of companies is needed to drive the investment cycle.

It is also pertinent to ask whether these firms should be protected behind high tariff walls or be more closely integrated with the global economy. So far, the government’s approach to trade has been inconsistent, displaying both fear — RCEP — and a hesitant embrace — the Australia and UAE trade deals. But with other countries having benefitted more from the China plus one play, the question is whether the Indian government will continue to be protectionist and defensive about trade agreements. Will the FTAs with the UK and the EU finally conclude?

Unless private investments and exports pick up, growth is likely to be lower, especially as the government’s capacity to increase capital spending will be further restricted by its rising committed expenditure — the Eighth Pay Commission is imminent. While the government has recently stated that as of now it has no plans to set up a new commission — going by past trends, it should ideally be set up next year as the salary revision should be due in 2026 — the pressure from employees is only likely to increase. This will impact not only the Centre’s finances but also that of state governments. Centre-state fiscal relations will also change with the 16th Finance Commission expected to submit its recommendations later next year. How the commission balances multiple competing interests will not only have consequences for fiscal architecture, but also on the fiscal contours within which political issues are raised, promises made, and elections contested.

In this uncertain global and domestic economic environment, perhaps a less hectic election calendar — the only state elections due next year are Delhi and Bihar — will give the government the space to focus on policy, not just manage the optics.

ishan.bakshi@expressindia.com