Mains Practice Questions

Introduction

The Reserve Bank of India forecasts robust growth, with real GDP expected to grow by 7% in 2024-25. Despite geopolitical tensions, supply chain disruptions, and tightening financial conditions, India's growth remains strong.

Body

Factors Contributing to India's Economic Growth

• Domestic Market-Shielding from Global Turbulence: India's large domestic market has acted as a buffer against global economic headwinds.
  • With a population of 1.4 billion and a growing middle class, internal consumption has helped maintain economic momentum.
  • In 2022, when many developed economies struggled, India's private consumption expenditure grew by 3.5% year-over-year in Q3 of FY 2024.
• Services-Led Growth-Riding the Digital Wave: India's IT and digital services sector has continued to thrive despite global uncertainties.
  • As developed countries seek cost-effective digital solutions, Indian IT companies have seen sustained demand.
  • The services sector grew by 7% year-over-year in Q3 of FY 2024.
• Diversified Export Basket-Spreading the Risk: Unlike many developing countries reliant on a few export commodities, India has a diversified export portfolio.
  • When global demand for certain goods declined, others picked up the slack.
  • For instance, while textile exports faced challenges, engineering goods exports grew by 2.13% in 2023-24, helping maintain overall export stability.
• Strategic Policy Measures: The Indian government's proactive policies have helped mitigate global shocks.
  • The Production-Linked Incentive (PLI) scheme, launched across 14 key sectors, has attracted investments and boosted domestic manufacturing.
  • The manufacturing sector has demonstrated impressive growth, expanding by 11.6% year-over-year in Q3 of FY 2024.
• Digital Transformation: India is witnessing a digital revolution through initiatives like Digital India and the democratization of the Unified Payment Interface, with internet penetration growing at 8% year-on-year in 2023.
  • This digital push is transforming industries, creating new growth opportunities, and enhancing productivity across sectors.

Potential Risks to India's Economic Trajectory

• Job Creation Lag: While India boasts impressive economic growth, it has not translated into sufficient job creation.
  • The unemployment rate in India was 8.1% in April 2024. (CMIE's Consumer Pyramids Household Survey).
• Persistent Inequality: The gap between rich and poor in India remains wide, with the Gini coefficient standing at 0.4197 in 2022-23.
  • India's wealth inequality is at a six-decade high, with the top 1% owning 40.1% of wealth. (World Inequality Lab)
• Export Struggle: Despite policy incentives, India's exports shrunk 3% in FY24.
  • The merchandise trade deficit stood at USD 19.1 billion during April 2024, up from USD 14.44 billion during April 2023, indicating challenges in maintaining export competitiveness in the global market.
• Climate Change Risks: India's rapid industrialization and urbanization have come at the cost of environmental degradation.
  • The Reserve Bank of India suggests that up to 4.5% of India's GDP could be at risk by 2030 due to climate change impacts.
• Potential Fiscal Slippage Risks: The general government fiscal deficit, while declining, is still projected at 6.8% of GDP by FY28 as per S&P Global.
  • Any deviation from the fiscal consolidation path could impact India's credit ratings and borrowing costs, potentially affecting overall economic stability.

Conclusion

India's economic growth has been impressive, driven by domestic demand, manufacturing resurgence, and a digital boom. India's success in navigating challenges like job creation,fiscal pressures, inequality, and climate change risks will determine its ability to achieve its aspiration of becoming a developed economy by 2047.