India’s Economic Slowdown and Its Future Outlook

Source: The post India’s Economic Slowdown and Its Future Outlook has been created, based on the article “2025: The new normal” published in “Business Standard” on 30th December 2024

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

Context: The article discusses India’s current economic growth, which has slowed down recently due to various factors such as government policies and global uncertainties. Despite high growth in previous years, future economic improvement remains uncertain, impacting investment, particularly in smaller companies. India’s Economic Slowdown and Its Future Outlook

For detailed information on India’s Economic Slowdown and Path to Recovery read this article here

What is the Current State of the Indian Economy?

1. The Indian economy is experiencing moderate growth, with a slowdown in recent quarters.
2. After achieving an 8.2% GDP growth in FY24, it decreased to 6.6% in Q1 of FY25 and further to 5.4% in Q2.
3. The growth rate is now described as the “new Hindu rate of growth” at around 5.5%.

Why is the Economy Slowing Down?

1. Restrictive Monetary Policies: The Reserve Bank of India has implemented policies that limit growth.
2. Reduced Government Spending: Due to elections, government capital expenditures have decreased.
3. Private Sector Slowdown: Domestic political issues, global uncertainties, and fears of economic dumping have slowed private investments.

How are Government Expenditures Impacting Growth?

1. Government spending has been a major driver of growth, with infrastructure projects significantly boosting economic activity.
2. However, government capital expenditure (capex) has declined by 6.6% from April to October of FY25. This reduction in spending is impacting the overall economic growth.

What is the Impact on Stock Markets?

Despite economic challenges, stock markets have seen significant gains:

1. The S&P BSE Smallcap Index rose by 47.52% in 2023 and 29% in 2024.
2. The Nifty MicroCap 250 Index increased by 66.44% in 2023 and 34.35% in 2024.
3. The Nifty 50 had smaller gains, rising by 20% in 2023 and 9.58% in 2024.

What is the Future Outlook?

The economy’s future remains uncertain, with modest growth expected to continue. High previous returns in the stock market, particularly among small-cap and microcap companies, may not be sustainable if economic growth remains subdued. The overall economic indicators suggest a potential prolonged slowdown, mirroring the period from 2014 to 2019.

Question for practice:

Discuss how the reduction in government capital expenditures is impacting India’s economic growth according to the article.