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As the Modi government prepares to unveil its Union Budget, India’s economic trajectory and status quo of macro-fundamentals draw intense scrutiny.
The recently released Economic Survey 2024 has, to the credit of the Chief Economic Advisor, provided a comprehensive view of the nation's economic landscape.
The survey projected a real GDP growth rate of 6.5 percent to seven percent for FY25. This forecast falls short of the Reserve Bank of India’s revised estimate of 7.2 percent, which was adjusted upwards from an initial projection of seven percent, citing concerns over escalating geopolitical conflicts leading to disruptions in supply chains, increased commodity prices, and renewed inflationary pressures.
A medium-term projection of 6.5 to seven percent is by no means going to make India (or Indians) ‘Viksit’ (developed). Chief Economic Advisor V Anantha Nageswaran has done a good job with the survey in keeping the aspirations and expectations realistic, based on current trends in growth and its sectoral composition.
When we delve deeper into understanding the interplay between growth, inflation, and the shifting economic landscape of the country, some fascinating insights are revealed.
According to the survey, the government’s timely policy interventions, combined with the Reserve Bank of India’s price stability measures, successfully maintained retail inflation at 5.4 percent. This is the lowest level since the pandemic, driven by a notable fall in core inflation for both goods and services. Core services inflation eased to a nine-year low in FY24, while core goods inflation declined to a four-year low.
Despite these achievements, inflation remains a critical concern, particularly food inflation. High food prices have consistently posed a challenge for the Modi Government and were likely a key factor in the BJP losing significant vote shares among middle-class, low-income, and poor voters in key states such as Uttar Pradesh and Rajasthan.
Food inflation, which has been the primary driver of overall inflation in India, rose from 6.6 percent in FY23 to 7.5 percent in FY24. In May 2024, the Consumer Price Index (CPI) increased to 4.75 percent from 4.31 percent in May 2023. Meanwhile, the Consumer Food Price Index (CFPI) for May 2024 surged to 8.69 percent up from 2.96 percent in May 2023. This spike was primarily driven by the rising prices of vegetables such as tomatoes, onions, and potatoes, exacerbated by extreme weather conditions including heatwaves and floods.
Another key highlight has been the shifting employment landscape, ie, while the unemployment rate has seen a decline, there has been a noticeable rise in gig employment. NITI Aayog’s estimates, based on national labour force survey data, indicate that in 2020–21, approximately 7.7 million workers were engaged in the gig economy. The workers represented 2.6 percent of the non-agricultural workforce and 1.5 percent of the total workforce in India.
This segment is projected to grow significantly, with the gig workforce expected to reach 23.5 million by 2029–30, constituting 6.7 percent of the non-agricultural workforce and 4.1 percent of the total employment in India.
While the expansion of the gig economy presents new employment opportunities for various groups—including youth, persons with disabilities, and women—it also brings significant challenges. One major concern is the creation of effective social security initiatives for gig and platform workers. Addressing this issue requires a targeted medium-to-long-term approach to develop a robust job-based social security safety net.
The survey also highlights the urgent need for job creation in the Indian economy. To meet the demands of the growing workforce, India must generate nearly 7.85 million jobs annually in the non-farm sector by 2030. Additionally, the survey addresses potential disruptions caused by artificial intelligence (AI), which could lead to a substantial decline in employment over the next decade. This underscores the necessity for a strong emphasis on skill development to prepare the workforce for the evolving job market.
Another concern has been about Foreign Direct Investment (FDI) inflows into India. The Economic Survey highlights several factors reshaping FDI patterns. Weakening growth prospects, economic fragmentation, trade and geopolitical tensions, and shifts in industrial policies, and supply chain diversification are all contributing to a more cautious approach by multinational enterprises (MNEs) towards overseas expansion.
Net FDI inflows to India decreased significantly from $42 billion in FY23 to $26.5 billion in FY24. However, gross FDI inflows showed only a modest decline, decreasing by 0.6 percent from $71.4 billion in FY23 to just under $71 billion in FY24.
The Economic Survey also suggests that India should seek increased FDI from Beijing to bolster local manufacturing and access to export markets, despite the current strained ties with China. Concerns persist, however, over the large trade deficit with China. India’s imports from China rose by 3.24 percent to $101.7 billion, widening the trade deficit to $85 billion in the last fiscal year, from $83.2 billion in FY22-23.
China has become India’s largest trading partner, with two-way commerce reaching $118.4 billion in 2023-24, surpassing the US. The growing trade imbalance and widening deficit underscores the need for strategic adjustments in trade policies and investment approaches.
The government is anticipated to maintain its focus on increasing capital expenditure (capex). This spending strategy, which increased by 12 percent year-on-year to Rs 15.8 lakh crore, has yet to significantly boost private investment levels over recent years. The approach has come at the expense of revenue expenditure needs.
In the 2023-24 Budget, expenditure on the social sector was budgeted at 18 percent of total expenditure, marking the first time it has fallen below 20 percent since 2009. This reduction reflects the government's prioritisation of capex spending, raising questions about the long-term implications for social sector funding and overall investment dynamics.
Overall, the Economic Survey 2024 offers a nuanced examination of India's economic landscape, balancing optimism with caution. The projected GDP growth rate of 6.5 percent to seven percent for FY25 underscores the importance of inflation control, food price stability, the gig economy's expansion, and challenges around FDI.
To effectively tackle these issues, the government must implement balanced fiscal policies, strengthen social security measures, invest in skill development, and pursue strategic trade and investment initiatives. A long-term strategy that addresses immediate concerns will be crucial.
The forthcoming Union Budget will be instrumental in guiding India towards sustainable growth, economic resilience, and social equity. At the very least, the finance minister, building from the CEA’s Economic Survey report, needs to prioritise fiscal consolidation, focus on increasing the tax revenue base, inflation management (via fiscal interventions), and direct employment generation.
(Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, Office of Inter-Disciplinary Studies, and Director of Centre for New Economics Studies (CNES), OP Jindal Global University. He is a Visiting Professor at the London School of Economics, and a 2024 Fall Academic Visitor to the Faculty of Asian and Middle Eastern Studies, University of Oxford. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
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