Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Looking at 2025, The Economy: Some positives, some concerns

Explained | Economics | Mains Paper 3: Indian Economy
Note4Students

From UPSC perspective, the following things are important :

Prelims level: Indian economy;

Why in the News?

The Finance Minister describes the slowdown in Q2 growth as a “temporary blip,” while the RBI has revised its GDP growth forecast for 2024-25 downward, from 7.2% to 6.6%.

Why RBI has revised its GDP growth forecast for 2024-2025 downward, from 7.2% to 6.6%?

  • Economic Slowdown: The RBI’s downgrade reflects concerns over a cyclical downturn, with GDP growth in Q2 FY25 at 5.4%, indicating fundamental challenges hindering growth prospects.
    • Fundamental challenges: Declining corporate investments, sliding consumption growth, and “softness” in urban demand have weakened the investment climate, prompting a downward revision in growth expectations.
  • Inflationary Pressures: Persistent inflation near double digits complicates monetary policy, forcing the RBI to consider prolonged high interest rates, which could further suppress growth and investments.

What are the expected growth rates for major economies in 2025?

  • India: Projected to achieve a growth rate of 6.5% over the next five years, maintaining its status as the fastest-growing major economy globally, despite a recent dip in economic output in 2024.
  • China: Growth is expected to stabilize around 4-5%, lower than its historical rates due to structural challenges like demographic shifts and a cooling property sector.
  • United States: Growth is projected at 1.5-2%, as the Federal Reserve maintains a tight monetary policy to counter inflation.
  • Eurozone: Growth is forecasted at around 1%, reflecting a sluggish recovery from the energy crisis and geopolitical uncertainties.
  • Japan: Expected growth rate of 1-1.5%, supported by fiscal stimulus but constrained by aging demographics.
  • Emerging Markets (excluding China and India): Growth is expected to range from 3-4%, depending on commodity prices and fiscal discipline.

How will inflation and monetary policy evolve?

  • Inflation Persistence: Inflation in India remains at the upper end of the permissible range, with food prices nearing double digits. This persistent inflation strengthens the argument for maintaining high interest rates, complicating the Reserve Bank of India’s (RBI) monetary policy decisions as they balance growth with inflation control.
  • Monetary Policy Adjustments: The RBI may need to reconsider its previous projections of GDP growth, which could lead to adjustments in interest rates. If inflation continues to be a concern, the RBI might maintain or even increase rates longer than necessary which impacts investment and economic activity.
  • Investment and Economic Recovery: A slowdown in corporate investments and a decline in household financial savings have been observed, which could hinder economic recovery.
    • The RBI’s ability to stimulate growth through monetary policy will depend on addressing these investment challenges and ensuring that fiscal measures effectively support economic activity without exacerbating inflation.

What are the key risks and uncertainties facing the global economy?

  • Investment Slowdown: A significant challenge is the sluggish performance of corporate investments, exacerbated by high food inflation and muted urban demand. This trend poses risks for growth and job creation.
  • Savings-Investment Gap: A decline in household financial savings down to 5.3% of GDP from 7.3% coupled with rising household debt (5.8% of GDP) presents a risk to economic stability1.
  • Credit Growth Decline: Falling credit growth, particularly in household borrowing for home purchases and limited industrial appetite for new projects, indicates a tightening economic environment.
  • Fiscal Challenges: Increased state expenditures on subsidies may strain fiscal resources, potentially affecting overall economic sustainability and growth prospects.

What should be done by the government? (Way forward)

  • Balanced Fiscal and Monetary Coordination: Governments should prioritize targeted fiscal measures to stimulate investment and demand while ensuring fiscal discipline, complemented by a flexible monetary policy that carefully balances inflation control with growth stimulation.
  • Boosting Household Savings and Investments: Implement policies to encourage higher household financial savings and incentivize corporate investments through tax reforms, reduced regulatory barriers, and support for credit access in productive sectors.

Mains PYQ:

Q The nature of economic growth in India in recent times is often described as jobless growth. Do you agree with this view? Give arguments in favour of your answer. (UPSC IAS/2015)

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