1- State of the Economy: Getting Back into the Fast Lane
Introduction
The global economy in 2024 exhibited steady yet uneven growth, influenced by geopolitical tensions, trade disruptions, and evolving monetary policies. While inflationary pressures eased in most advanced economies, certain sectors, especially services, continued to experience persistent inflation. India’s economy remained resilient, with real GDP estimated to grow by 6.4% in FY25, driven by robust agricultural and services sector performance. However, challenges such as global demand fluctuations, domestic inflation volatility, and policy uncertainties persist. This chapter provides a comprehensive analysis of the global and Indian economic landscape, including fiscal discipline, financial sector trends, inflationary pressures, employment growth, and external trade dynamics.
Global Economic Scenario
Growth Trends and Regional Disparities
- Global economic growth projected at 3.2% in 2024 and 3.3% in 2025.
- Strong services sector performance, while manufacturing lags due to weak demand in Europe and Asia.
- US Federal Funds Rate (FFR) uncertainty influencing global markets.
- Inflation control efforts leading to varying monetary policies across economies.
Inflation and Commodity Prices
- Inflationary pressures have eased, though services inflation remains a concern.
- Commodity prices stabilized but remain at risk of synchronized price increases.
- Global shipping disruptions and energy price fluctuations impacting trade.
Financial Market Trends
- Sovereign bond yields in advanced economies fluctuating due to inflation uncertainty.
- Emerging markets, including India, witnessing capital inflows and currency fluctuations.
Domestic Economic Trends
Macroeconomic Performance
- India’s GDP projected to grow at 6.4% in FY25, supported by agriculture and services.
- Rural demand strengthened by record Kharif production and improved agricultural conditions.
- Manufacturing sector facing headwinds from weak global demand and seasonal domestic factors.
- Stable private consumption reflecting strong domestic demand.
Fiscal and Monetary Stability
- Fiscal discipline maintained with controlled deficits and strategic expenditure management.
- Stable external sector with strong remittance inflows and services trade surplus.
- RBI adopting a cautious stance on monetary policy in response to inflation trends.
Inflation and Price Trends
Consumer Price Inflation
- Retail inflation moderated from 5.4% in FY24 to 4.9% in FY25.
- Core inflation declined, but food inflation remains volatile due to supply chain disruptions and climatic factors.
- Pulses and vegetable prices contributing to inflation spikes.
External Trade and Balance of Payments
- Merchandise exports grew by 1.6% YoY, with non-oil, non-gold exports rising 9.1%.
- Import growth of 5.2%, driven by higher non-oil, non-gold purchases and increased gold demand.
- India’s current account deficit (CAD) remains manageable at 1.2% of GDP.
Banking and Financial Sector
Banking Stability and Credit Growth
- Gross Non-Performing Assets (NPA) at a 12-year low of 2.6%.
- Capital adequacy ratio for scheduled commercial banks (SCBs) at 16.7%.
- Credit growth driven by housing and personal loans, with moderate industrial credit growth.
Financial Market Developments
- Foreign portfolio investments (FPI) inflows declined to USD 10.6 billion in April–December 2024.
- India’s forex reserves peaked at USD 704.9 billion before moderating to USD 634.6 billion in January 2025.
- Government securities included in JP Morgan EM Bond Index, boosting debt market participation.
Employment and Labour Market Trends
Labour Force and Employment Trends
- Unemployment rate declined from 6% in 2017-18 to 3.2% in 2023-24.
- Labour force participation rate (LFPR) and worker-to-population ratio (WPR) improved.
- Formal sector employment expanded, with EPFO net additions doubling from 61 lakh in FY19 to 131 lakh in FY24.
Technological Disruptions and AI Impact
- AI adoption reshaping India’s labour market with opportunities for productivity gains.
- Need for workforce upskilling to align with AI-driven transformations.
- Government initiatives enhancing job market formalization and social security provisions.
Future Outlook and Policy Recommendations
Growth Prospects and Risks
- Economic growth projected between 6.3% and 6.8% in FY26.
- Geopolitical risks, trade policy shifts, and commodity price fluctuations pose challenges.
- Reforms in infrastructure, skill development, and regulatory frameworks necessary to sustain growth.
Strategic Policy Measures
- Strengthening grassroots structural reforms to enhance global competitiveness.
- Encouraging private sector investments through policy stability and deregulation.
- Enhancing trade diversification to reduce dependence on a few key export markets.
- Adopting a balanced monetary policy approach to mitigate inflationary risks while supporting growth.
Conclusion
India’s economic resilience amid global uncertainties reflects strong macroeconomic fundamentals, strategic fiscal management, and steady policy execution. While challenges such as inflation volatility, external trade uncertainties, and employment shifts remain, prudent policy measures can mitigate risks and sustain long-term growth. Emphasizing investment in technology, infrastructure, and skill development will be crucial for maintaining economic momentum and enhancing India’s global competitiveness.