Why the Indian economy is hitting a sweet spot
India’s economy is receiving a vote of confidence in various global forecasts amid the general election season. However, says ISAS academic Amitendu Palit, robust prospects for the Indian economy will very much depend on how some risks to the forecasts play out.
India is presently holding its general elections. As the elections progress over a gruelling seven-week stretch, there is cheerful news about the long-term prospects of the economy.
Several optimistic growth forecasts have come out on India. The International Monetary Fund (IMF) raised its forecast for India by 30 basis points to 6.8% for FY25. The higher forecast is due to robust domestic demand and a growing working-age population. Earlier, the Asian Development Bank (ADB) upgraded its forecast for FY25 to 7% on the back of strong investments and a thriving services sector. Strong investments and export growth influenced the OECD’s upgraded forecast of 6.6% for FY25. The World Bank has forecast 6.6% too while Fitch and Standard Chartered suggest 7%.
Some key factors in this regard are conducive circumstances for long-term private investments, stable growth of private consumption and robust inflows of foreign remittances.
Better projections for India than other countries and regions
The projected growth rates for India are striking, compared with those for the world, key regions and major economies. A GDP growth rate of 6.6-7% for India, as indicated by various forecasts, will be more than double the projected global growth rate of 3.2% for FY25. It will be much higher than those for emerging and developing Asia, emerging and developing Europe, Middle East and Central Asia, and Latin America and the Caribbean.
In fact, India’s projected growth rate for FY25 is higher than both the US and China, which are expected to grow by 1.9% and 4.1% in FY25. India’s GDP growth will also be much higher than that of the ASEAN, projected at 4.6% for FY25, with only Philippines and Vietnam expected to grow by around 6% in the region.
These comparisons make it clear that as the world’s 5th largest economy, India will be a major contributor to global GDP for FY25 and also in the years to follow. The robust growth rate for FY25 is consistent with expectations of India becoming the world’s 3rd largest economy by 2030 surpassing Japan and Germany.
Policies that help investors take the long view
Bright prospects of the Indian economy are being driven by healthy macroeconomic conditions. Some key factors in this regard are conducive circumstances for long-term private investments, stable growth of private consumption and robust inflows of foreign remittances. These conditions combine to maintain a strong aggregate demand in the economy along with stability in the balance of payments.
Investments are being facilitated by supportive government policies. Policy reforms by the Modi government have been useful in this regard. A notable example is the foreign investment policy. India’s current foreign investment policy allows such investments in practically all sectors of the economy. Except some prohibited sectors (e.g. atomic energy, railway operations, lottery, gambling), all other manufacturing and service industries can receive foreign investments.
Over the years, India has gradually lifted controls from foreign investments in “strategic” sectors like mining, petroleum, defence production, civil aviation (both airports and air transport services), satellites, telecommunication, e-commerce, banking, insurance and pharmaceuticals.
Such liberalisation has attracted large inflows of foreign investments to India. Major global businesses that have established large-scale long-term operations in India in the last few years include Apple, Amazon, Boeing, Microsoft, Walmart and Google. They are in addition to Intel, Qualcomm, Samsung, Hyundai, Toyota, and Panasonic in manufacturing, and a great variety of global investments in financial services, banking, telecom and infrastructure.
India is being looked at by businesses as an economy promising stable yields on long-term investments. As a result, it is able to attract investments in cutting-edge hi-tech industries like semiconductors, smartphones, aircraft manufacturing and defence production.
The issuing of unique digital identities and distribution of public welfare benefits through the unique identity-enabled digital payment platforms has brought large chunks of unbanked people into the formal financial sector...
Explosive growth in e-commerce and other sectors
On the other side, India’s large body of young and rapidly urbanising population is accelerating the growth of e-commerce in the country. There’s also similar explosive growth in transport and communication, hospitality, digital payments and healthcare services.
Given the high consumer demand for these services, investment prospects in these areas are highly lucrative. The government, on its part, has contributed to the overall encouraging prospects by investing heavily in creating domestic infrastructure.
India has also been able to maintain high private consumption through its sustained efforts to create a citizen-centric digital public infrastructure (DPI). The issuing of unique digital identities and distribution of public welfare benefits through the unique identity-enabled digital payment platforms has brought large chunks of unbanked people into the formal financial sector thereby enhancing overall consumption levels. The process has also generated considerable savings for the government by making welfare schemes more efficient.
Significant part of the global workforce
India is the highest foreign remittance recipient in the world. It received US$125 billion in remittances in 2023, far higher than Mexico and China, the second and third largest recipients with US$67 billion and US$50 billion respectively.
The remittances reflect the significant presence of Indians in the global workforce, especially in high-income countries (e.g. the US, the UK, the Middle East and Singapore). A fast-rising trend of remittances shows more Indians are moving to overseas jobs, including the more highly paid ones. The remittances have been significant in driving domestic private consumption demand in India and are likely to continue playing a critical role in this regard.
Managing prices will be one of the most important policy challenges for the new government as it settles into office and works on maintaining the high growth momentum in the economy.
The materialisation of robust prospects for the Indian economy, through high GDP growth backed by strong inflows of private and public investments and robust consumption, will depend on how some risks to the forecasts play out. A significant one among these is headline inflation. Rising domestic prices can adversely affect the macroeconomic fundamentals and pull down the real rate of GDP growth by trimming investments and consumption.
Other serious economic management problems can arise from further disruptions in global conditions, like prolongation of disturbances in the Red Sea, Gaza and Ukraine. All these can exert upward pressure on energy, food and other import prices. Managing prices will be one of the most important policy challenges for the new government as it settles into office and works on maintaining the high growth momentum in the economy.
