Why India Should Take a Conservative Approach to Growth Ahead of Budget 2025
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This post on  Why India Should Take a Conservative Approach to Growth Ahead of Budget 2025 has been created based on article “Ahead of Budget 2025, why India should take a conservative approach to growthpublished in The Indian Express on 28th January 2025.

Conservative Approach to Growth Ahead of Budget 2025

UPSC Syllabus topic: GS Paper 3- Indian Economy

Context: The article discusses why India should adopt a conservative approach to growth ahead of the 2025 Budget. It emphasizes the importance of achieving sustained, long-term growth with low risk rather than chasing aggressive, short-term targets that could lead to instability.

Why is a conservative approach to growth important for India?

  1. A conservative approach allows India to sustain long-term growth with minimal risks. Historical evidence shows that countries relying on debt-fueled growth often face sharp slowdowns or restructuring.
  2. For India, achieving consistent 6% real growth over 20 years would increase GDP per capita from $2,650 to $10,000 by 2045. Even at 5.5% growth, this target could be achieved by 2047.
  3. The timeline (2045 vs. 2047) is less critical than achieving sustainable, low-risk growth over extended periods.

What are the economic assumptions for this growth trajectory?

  1. India Inflation: 5% per annum
  2. US Inflation: 2% per annum
  3. INR Depreciation: 3% per annum
  4. Population Growth: 1% per annum

What challenges are contributing to the current moderation in growth?

a) Rising Household Indebtedness:

  1. Indian households have shifted from borrowing for emergencies or appreciating assets to borrowing for depreciating assets and experiences.
  2. Factors like click-driven EMIs, social media influence, e-commerce convenience, and lack of incentives for cash-down purchases contribute to debt-led consumption.
  3. Rising retail NPAs indicate higher household indebtedness. Debt-fueled consumption shifts growth from the future to the present, leading to eventual payback challenges.

Solution:

  1. Encourage cash-down purchases by offering better pricing compared to EMI-based purchases.
  2. Evaluate the long-term impact of debt-fueled consumption and tweak risk weights on personal loans.

b) Competition from Chinese Exports:

  1. Despite the China+1 strategy, India faces stiff competition from China’s robust manufacturing base, built over decades of investments and infrastructure development.
  2. China’s surplus capacity, due to weak domestic demand, is leading to deflation in export prices, affecting Indian exporters.
  3. India has potential to grow its manufacturing footprint with government support and favorable geopolitical conditions. However, progress will be slow and challenging.

c) Temporary Global Headwinds:

  1. Rising US interest rates, a strong US dollar, and a narrowing yield gap (2.2%) between India and the US.
  2. Net FDI has sharply fallen due to MNCs selling stakes in their Indian operations (e.g., Timken, GE Vernova, Whirlpool, Hyundai). These sales are driven by sector valuations, not pessimism about India.

How are stock markets responding to growth narratives?

  1. Small and mid-cap stocks have gained popularity due to high returns post-Covid. However, this stems from the sharper fall they experienced during the downturn. For instance:
    1. Large-caps fell from 100 to 70 during Covid, resulting in a 40% recovery.
    2. Small/mid-caps fell from 100 to 30, yielding over 200% recovery to return to 100.
  2. Nearly 75% of current demat accounts (out of 20 crore) were opened post-Covid, meaning new investors lack experience with earlier market cycles like 1992, 2000, or 2008.
  3. Investors should remember the principle of “reversion to the mean,” as highlighted by John C. Bogle, and temper expectations of sustained small/mid-cap outperformance.

What should policymakers and investors focus on?

For Policymakers:

  1. Prioritize sustainable growth with low risk rather than short-term acceleration.
  2. Address the rising indebtedness by promoting financial literacy and discouraging debt-fueled consumption.
  3. Support manufacturing growth with better policies and infrastructure, recognizing the slow progress.

For Investors:

  1. Avoid being swayed by IPO frenzies or small/mid-cap hype. Understand the cyclical nature of markets and adopt a long-term perspective.

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