- Friday, January 31, 2025
India is among the top-performing countries globally but sluggish compared with recent performance
By: India Weekly
THE Economic Survey 2025 has projected that the country’s economy will grow 6.3-6.8 per cent in the next fiscal year. India is among the top-performing countries globally but sluggish compared with recent performance.
The world’s fifth-largest economy posted 8.2 per cent GDP growth in the 2023-24 financial year but has slowed down since due to lower infrastructure spending, a weaker manufacturing sector and muted urban consumption. The middle class is squeezed by high prices and low wage growth.
It is also facing a slump in foreign investment, and the net foreign direct investment inflows have declined over the last couple of years.
Here are five aspects we need to watch out for.
1.Taxation:
During the pandemic, the government kept the economy growing by raising infrastructure spending and limiting wasteful expenditure to keep government finances in good shape.
That lifted headline GDP growth, but has not supported wages or helped consumption sustain an annual expansion of more than seven per cent over the past three years.
The has led to muted consumption, where individuals are not spending. Low wage growth and lack of employment generation are seen as the main reasons.
On top of it, the citizens are heavily taxed. India’s tax-to-GDP ratio is close to 19 per cent, which is on the higher side, when compared with other countries.
Interestingly over the last few years, the taxes paid by individuals have overtaken the taxes that companies pay.
A loosening of the tax burden will put more money in the hands of people, which could improve private consumption.
The government would lose out on revenue, but a boost in consumption may offset this loss.
2.Dwindling foreign investments
Foreign investment has dwindled over the years. In 2014, it accounted for 2.5 per cent of our economy, but today its has shrunk to 0.8 per cent.
While this has been due to a host of global factors, India’s complex regulatory framework is also seen as a major impediment.
The introduction of a single-window clearance system, dilution of compliance burdens, and digital transformation of processes could reverse the trend.
3.Boosting exports
While a soft Indian rupee may have helped exporters, various protectionist policies have hurt their global competitiveness.
Constraints like high import duties on raw materials that Indian manufacturers need have eroded the competitiveness of Indian exporters.
The government’s production-linked incentive schemes have helped only some sectors.
The budget should look at streamlining regulation, rationalisations in tariff, and sharper industrial policy that encourage companies to be competitive in the global market.
4.Muted consumption
The economic slowdown caused during the Covid period, high inflation and erratic wage growth have taken a heavy toll on household savings.
India lowered its corporate tax rate sharply in 2019 to 22 per cent from 30 per cent, in the hope of spurring investment, but analysts say it has mainly boosted corporate profit margins without spurring new investments or jobs.
A report prepared for the government by industry body FICCI and Quess Corp showed that the compounded annual wage growth rate (CAGR) of wages between 2019 and 2023 was between 0.8 per cent and 5.4 per cent, while inflation grew at an annual average rate of 5.7 per cent in the last five years.
During this period corporate profits have grown four times.
The government will have to ease interest rates for greater access to personal loans and revise personal tax exemptions to boost disposable income.
But corporates also need to do their bit. In the Economic Survey, the chief economic advisor, V Anantha Nageswaran, has noted “corporate profitability soared to a 15-year peak in FY24, while wages have lagged.”
“Increasing income wages is not a moral ask but in self interest of the private sector, as it has a direct impact on aggregate demand,” he added.
5.Capital expenditure
The Modi regime has been very pro-active on capital expenditure, which helps in spurring growth, especially when private consumption is facing headwinds.
In the short-term it helps generate jobs, and in the long term, a better infrastructure makes industries more competitive.
Ramping up capital expenditure can help boost economic growth.
The government can also create conditions for greater participation of the private sector.
