Economic Survey: Strategizing for growth amidst global headwinds

According to the Economic Survey, India's economy will grow at 6.3-6.8 percent in the financial year 2025-26.

Economic survey 2024-25 points to a slight deceleration in India’s likely real GDP growth for 2025-26. According to the survey, this growth may be in the range of 6.3-6.8% for 2025-26. The mid-point of this range is 6.55% as compared with the corresponding mid-point of the range given at 6.75% for 2024-25. The survey recognises the role that government capital expenditure has played in supporting investment demand and overall aggregate demand. It emphasizes the need for continued support to investment both from the central and the state governments.

Global headwinds

The survey deals extensively with the current global economic situation and the challenges it poses to India’s growth prospects. The ES acknowledges that in its pursuit for Atmanirbhar Bharat particularly in manufacturing, India has a considerable distance to cover as it accounts for only 2.8% share of global manufacturing as compared to China’s at 28.8%.

The Survey also highlights the constraints that India will face in its endeavour to increase its share of manufacturing in its domestic GDP as well as in global manufacturing due to the existence of excess capacities across the world. Also, there is a clear global tendency to become inward looking whereby major economies are protecting their domestic industries by relatively higher tariffs and overall restrictive trade policies. Under such circumstances, India has to carefully calibrate its own path. There is a need to levy higher import tariffs on final goods but keep them moderate on inputs and intermediate goods which serve as inputs for production located within India.

In general, India may encourage production of final goods within Indian territory and discourage imports of finished products. In addition, Indian manufacturing must focus on strategic and forward-looking sectors including investments in information technology especially in AI capacities.

Roles of government and private investments

Government will have to continue investing in infrastructure building but progressively change its focus towards providing the underlying infrastructure for futuristic sectors including AI, Gen-AI and defence. The survey signals that going forward, public capex will continue to play the role of a growth driver. It may however be better supported by private capex now that capacity utilization at 74.0% in 1QFY25 is higher than the long-term average of 73.8%. When this happens, private investment starts to take off. Further, there is a need to build-up overall infrastructure for futuristic industries such as space, robotics, high-definition cameras/telescopes/microscopes, aircraft manufacturing, and 3D printing of goods and buildings. There is a likelihood that private investment would also start building up new capacities. The survey also argues for an aggressive pursuit of deregulation so that ease of doing business is improved considerably. In this endeavour both the GoI and state governments may have a role to play.

Improvement in government finances

The survey highlights improvement in India’s government finances in several dimensions. First, the size of the government measured in terms of total general government expenditure to GDP ratio has increased to about 31% of GDP in 2023-24 (RE) which is significantly higher than 27% in 2019-20. Second, the tax-GDP ratio has increased from a trough of 16.1% in 2019-20 to a peak of 18.5% in 2023-24 (RE) which is slated to further increase to 18.8% in 2024-25 (BE). Third, the quality of expenditure of the GoI has improved. The share of capital expenditure in overall expenditure is expected to account for 21.4% of total GoI’s expenditure in 2023-24 from a level of close to 15% in 2021-22. This improvement in the quality of expenditure is also reflected in the quality of fiscal deficit. The share of revenue deficit in fiscal deficit has fallen from a peak of nearly 80% in 2020-21 to a level of 46% in 2023-24. Given budgetary expectations, we expect this quality to improve in 2024-25 as well as in 2025-26. These improvements will enable the government to effectively intervene in the economy in the presence of global headwinds.

Review of employment situation

In the context of the employment situation, the survey notes several positive trends. As per the Periodic Labour Force Survey (2023-24), it notes that the unemployment rate has significantly declined over time in recent post pandemic years. Labour force participation rate has also improved. The survey continues to emphasize as before, that in order to fully capitalize on the demographic dividend, attention must be paid to reskilling, upskilling, and new-skilling. This calls for higher allocations for education both in the central and state budgets supplemented by higher allocations for health.

(D.K. Srivastava is Chief Policy Advisor, EY India. Muralikrishna Bharadwaj, Senior Manager, Tax and Economic Policy Group, EY India, also contributed to the article)