India’s Economic Growth Challenges and Policy Reforms

Source: The post India’s Economic Growth Challenges and Policy Reforms has been created, based on the article “Donald Trump, climate change: Global threats to India’s growth story” published in “Indian Express” on 1st February 2025

UPSC Syllabus Topic: GS Paper3-Indian Economy and issues relating to planning, mobilisation, of resources, growth, development.

Context: The article discusses India’s economic growth, fiscal policies, and investment trends. It highlights slower GDP growth, inflation concerns, and private investment challenges. It stresses the need for deregulation, better capital spending, energy transition, and policy reforms to sustain long-term economic growth.

For detailed information on India’s Economic Challenges and Policy Reform Needs read Article1, Article2, Article3

How is India’s GDP Growth and Global Economic Environment Changing?

1. India’s first advance GDP growth estimate for this fiscal year is 6.4%, lower than last year’s 2. 2. Economic Survey projection of 6.5-7%.
2. This is slightly below the pre-pandemic decadal average of 6.6%.
3. Nominal GDP growth is 9.7%, lower than the 10.5% target in the budget.
4. The US is growing near its trend rate of 2% in 2025, while China is slowing and Europe is below trend.
5. Donald Trump’s tariff threats could impact India’s trade with the US.
6. The World Bank forecasts India’s growth at 6.7% next year, while the IMF expects 6.5%.

What is Driving India’s Investment and What Challenges Remain?

1. Public and household investments are driving post-pandemic recovery.
2. Private corporate investments are still weak.
3. The Economic Survey notes that India competes for investments with both emerging and advanced economies.
4. The budget projected 17.1% growth in capital expenditure (capex), down from 28.2% last year.
5. Capex growth is lagging due to slow spending by the Centre and states.
6. Nearly 40% of central projects (costing over ₹150 crore) exceeded budgets and deadlines.

How Can India Improve Manufacturing and Trade?

1. India needs a clear, long-term tariff policy for inputs, intermediates, and final products.
2. A stable tariff regime will boost investment, especially in manufacturing.
3. The Economic Survey stresses the need for deregulation to unlock domestic-led growth.

What are the Inflation and Energy Transition Challenges?

1. Inflation is expected to moderate next year.
2. Crisil forecasts 4.4% retail inflation, assuming a normal monsoon and crude oil at $75 per barrel.
3. Food inflation remains high (8.4% in December 2024), delaying interest rate cuts.
4. India must strengthen food processing, climate-resilient crops, and cold storage to control food inflation.
5. India faces an energy transition challenge, as industry and infrastructure sectors are carbon-intensive.
6. India depends on imports for solar energy components like polysilicon, ingots, and wafers.
7. A strategic policy shift is needed to build domestic capacity.

What Reforms are Needed for Growth and Fiscal Stability?

1. India must ease regulatory hurdles in labour laws, land acquisition, taxation, and dispute resolution.
2. The PM Gati Shakti plan improved logistics; a similar approach can accelerate broader reforms.
3. High nominal GDP growth (14.2% between 2022-24) helped fiscal consolidation.
4. This fiscal year, nominal GDP grew only 9.7%, below budget expectations.
5. Fiscal consolidation should be gradual to maintain economic momentum.

Question for practice:

Examine the factors affecting India’s GDP growth and the policy measures needed to sustain long-term economic growth.