India's growth is projected to reach 6.5% in five years, but short-term issues like slowing investments, rising fiscal deficits, and inflation persist. Government spending has increased post-election, but inflation remains high. MSMEs are recovering, but private investment struggles due to corporate uncertainty and tax laws. Fiscal consolidation is a focus.
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India is expected to grow at a rate of 6.5% over the next five years, however, short-term concerns such as slowing investments, rising fiscal deficits, and inflation continue.
After the general election, the government's spending has increased. A recent reduction in the cash reserve ratio (CRR) has freed up funds previously held by banks with the RBI.
In some industries, the capex cycle has restarted, boosting capital formation. Economists believe the growth will be driven by investment, and monetary easing will help to support growth in the coming fiscal year.
The central bank has kept interest rates high for longer than necessary due to an overly optimistic GDP growth forecast. Despite this, inflation remains at the upper end of the permissible range, with food prices rising by nearly double digits.
A decrease in public investment has contributed to slower overall investment growth. However, this pattern is expected to change in the second half of the fiscal year.
With fewer state elections scheduled in 2025, there is room for reform. However, there appears to be a lack of enthusiasm for implementing pending reforms such as the Labour Codes. This reduced appetite for reforms may slow the pace of future economic changes.
Corporate growth is slowing mainly due to declining consumption growth. However, Micro, Small, and Medium Enterprises (MSMEs) are showing signs of recovery. These businesses, which were severely impacted by demonetisation, GST implementation, and the Covid-19 lockdown, have the potential to recover and compete with the corporate sector.
Two key signals indicate that MSMEs may be recovering
If MSMEs recover, the two branches of the K-shaped recovery, which represent divergent economic paths for different sectors, may narrow. This could bring more balance to the economic recovery, benefiting both small and large businesses.
Female labour force participation is increasing, particularly in rural areas. For example, in FY24, 39.6% of women with postgraduate education were employed, up from 34.5% in FY18. Similarly, participation by women with higher secondary education increased from 11.4% in FY18 to 23.9% in FY24.
Private investment is struggling mainly due to corporate uncertainty and a lack of optimism. According to experts, Indian complex tax laws and administration are significant barriers to creating a favourable investment environment.
As businesses face challenges in various industries, there is less room for expansion and hiring, which could have long-term consequences for the economy.
Companies must feel confident about the future, and frequent changes in tax regulations create a climate of caution, making them hesitant to invest.
According to the RBI's Financial Stability Report, household net financial savings fell to 5.3% of GDP in FY23, down from 7.3% in FY22, and well below the previous decade's average of 8%. Household net savings are a family's total money and investments, including deposits, stocks, and bonuses, less any money owed, such as loans and other debt.
Household debt has risen greatly. Annual borrowings have reached 5.8% of GDP, the second-highest level since the 1970s. Another source of concern is that a large portion of savings are entering financial markets without first going through the banking system.
Fiscal consolidation has been a consistent theme at the centre. According to the International Monetary Fund a projected fiscal deficit reduction from 6.4% to 5.9% of GDP in FY24 will stabilize public debt at around 83% of GDP.
The RBI has expressed concern about states' sharp increase in expenditure on various subsidies, including farm loan waivers and cash transfers.
According to Axis Bank's India Outlook report, by 2025, 14 states will have some form of "handout" scheme for approximately 134 million women, accounting for nearly 20% of all women in India. These programs cost the government nearly Rs 1.9 lakh crore each year, or about 0.6% of the country’s GDP.
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PRACTICE QUESTION Q.Critically analyze the potential of Micro, Small, and Medium Enterprises (MSMEs) in revitalizing India's economy. (150 words) |
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