India's Economic Growth and Challenges in FY 24-25

India's real GDP grew by 6.5% year-on-year in FY 24-25, with a notable 7%-plus surge in the last quarter. The domestic economy showed resilience with strong agricultural growth, uneven industrial gains, and a buoyant services sector.

Domestic Economic Headwinds

• Stubbornly indifferent private capital expenditure (capex).
• Weak urban consumption and patchy rural recovery.
• Household balance sheet stress and a negative credit impulse.

International Concerns

• Uncertainty over U.S. tariffs potentially affecting global investment flows.
• Opportunities for India in trade diversion and supply chain shifts.
• Challenges in export performance due to high tariffs and trade deal negotiations.

Supply Side Problems

The World Bank identifies capital expenditure, especially by the private sector, as India's biggest challenge. Attempts by the BJP-led NDA government to address this include:

• Resolving the twin balance sheet problem.
• Implementing Goods and Services Tax (GST) in 2017.
• Introducing the insolvency code in 2016.
• Corporate tax cut in 2019 followed by major income tax relief.

Capex and Investment Challenges

• Despite corporate tax cuts, capex has remained stagnant, with factories operating at around 75% capacity.
• Gross fixed capital formation has stayed at 25% since 2014.
• Companies are scaling down salary outlays, causing concern for policymakers.

Limits to Intervention

The RBI has cut lending rates by 100 basis points since February. However, room for further cuts is limited. The government has also expended most of its financial options, leading to a diminished appetite for reforms.

Looking Ahead

Despite a projected long-term growth rate of 6.5%, there are challenges:

• The need to generate over 8 million jobs annually until 2030.
• Bridging wealth disparities and offering generational mobility.
• External challenges include protectionist regulations, ongoing wars, and a weakening American economy.

Opportunities and Recommendations

• Reducing compliance burden on businesses through deregulation.
• Lowering protectionist barriers and investing in education and skilling.