India’s real gross domestic product (GDP) growth will likely grow at 6.3-6.8 per cent in 2025-26, the Economic Survey 2024-25 projected on January 31, signalling moderate prospects buffeted by multiple headwinds, including a looming global trade war and artificial intelligence (AI)-induced disruptions.
The Survey notified a watch out notice on impending consequences from rising global protectionism and resultant global supply chain disorders that could erode export India’s competitiveness besides fanning inflation.
The restrained growth projection underscores the challenges facing the Indian economy as it navigates a complex domestic and global landscape. Private investment has been sluggish and foreign portfolio and direct investment to India has moderated in 2024-25.
In a clear message to the private sector, the Economic Survey 2024-25, authored by Chief Economic Adviser V. Anantha Nageswaran, that it is time for the industry to pick the tab on investment, technology adoption and job creation, while maintaining profitability.
“Public sector investment alone cannot meet the requirements of infrastructure, and private sector participation will be crucial to bridge the gap”, it said, although a long election timetable in 2024 may be partly instrumental in applying the brakes on private sector capital expenditure, besides underutilised capacities.
Stock markets - often a reliable bellwether for the real economy's fortunes - have retreated significantly from their recent peaks, hinting at a potential slowdown in business sentiment and, by extension, the broader economy.
Deregulate: Govt needs to get out of the way
To foster innovation and enhance competitiveness, the Survey made a strong case for more deregulation, and asked the government to adopt the approach of "getting out of the way,” allowing businesses to focus on their core mission.
This requires rolling back regulation, embracing risk-based regulations, and changing the operating principle of regulations from "guilty until proven innocent" to "innocent until proven guilty."
India's hierarchical and kinship-based society, with a low trust quotient outside close-knit communities, inhibits scale and innovation. To overcome this, the government must set the agenda for building trust and simplifying regulations. By doing so, India can unlock its potential and achieve its vision of Viksit Bharat by 2047.
“Getting out of the way” and allowing businesses to focus on their core mission is a significant contribution that governments around the country can make to foster innovation and enhance competitiveness. The most effective policies governments - Union and States - in the country can embrace is to give entrepreneurs and households back their time and mental bandwidth. That means rolling back regulation significantly,” it said.
Rising Protectionism
The Survey also notified potential risks from the rising global protectionist policies.
India is traversing a precarious global trade landscape, where the spectre of US tariffs and supply chain disruptions threatens to upend its export-driven growth. As the world's fifth-largest economy, India's trade fortunes are intricately tied to the shifting dynamics of global geopolitics.
“The evolving global trade dynamics, marked by gradual shifts towards greater protectionism, require assessing the situation and developing a forward looking strategic trade roadmap,” the survey said.
To strengthen competitiveness and further integrate into global supply chains, India should focus on reducing trade-related costs and enhancing export facilitation to create a more vibrant export sector.
“This proactive approach will help India continue to thrive in an ever-changing global market.”, the Survey said.
The Trump administration's protectionist policies, coupled with the ongoing Sino-US trade tensions, have created a complex web of risks for Indian exporters. With the US and China accounting for a significant slice of India's total trade, any escalation in tariffs or trade restrictions could have far-reaching consequences for India's economy.
As the Indo-Pacific region becomes increasingly contested, India's trade strategists are working out moves to formulate a robust geostrategic framework that prioritizes economic resilience, supply chain security, and strategic partnerships.
“This calls for a new strategic trade roadmap for India. To remain competitive and enhance its participation in global supply chains, India must continue reducing trade costs and improving facilitation to boost export competitiveness. Much remains to be done to enhance trade competitiveness. The good news is that it is doing so,” the survey said.
This could necessitate a redrawing of the strategic map, reducing dependence on traditional trade routes, and promoting economic integration with newer geographies.
The Survey pointed out that global supply chains continue to face significant disruptions due to geo-political uncertainty, i.e., the rise of protectionism, wars, and climate-related challenges. These disruptions in supply chains pose a risk to the global services landscape, the survey said.
Jobs in times of AI
Creating millions of jobs for India's burgeoning youth population poses a formidable policy challenge, one that demands a radical rethink in the face of AI-induced disruptions.
“AI is anticipated to surpass human performance in critical decision-making across various fields, including healthcare, research, criminal justice, education, business, and financial services. This can result in large scale labour displacement, especially at the middle- and lower-quartiles of the wage distribution,” the Survey said.
As the Survey notes, productive jobs are the linchpin of inclusive growth. To address this pressing issue, the private sector must step up and assume responsibility for creating employment opportunities.
The government has already taken steps in this direction, introducing three new employment-linked incentive schemes in its previous budget. These initiatives, part of the Prime Minister's package, aim to encourage companies to hire more and invest in capacity building.
However, the rapidly evolving job market, fueled by AI and automation, requires a more nuanced approach. India must prioritize imparting 21st-century skills to its youth, focusing on critical thinking, creativity, and adaptability. This entails a paradigm shift in education, with the National Education Policy (NEP) playing a pivotal role in recalibrating curricula and pedagogies.
The Survey said that fears of adverse effects of large-scale AI adoption may not seem as far-fetched and India should take this very seriously.
“India's economy is predominantly service-oriented, with a large portion of its IT workforce engaged in low-value-added services. These roles are particularly vulnerable to automation, as companies may replace labour with technology to reduce costs,” it said.
IBC 2.0
High real interest rates coupled with macroprudential measures to reinforce systemic financial stability have slowed down credit-off take by restricting lending, especially among smaller firms with fewer financing options and sizeable reliance on bank credit.
The Survey made a case for looking beyond macroprudential instruments and batted for a second coming of the Insolvency and Bankruptcy Code, particularly for the benefit of micro, small and medium enterprises (MSMEs)—the lifeblood of India’s economy in many ways,
A continuously evolving and improving IBC framework is important to achieving a 7-8 per cent growth over the next decade, it said.
“Macroprudential tools are handy for muting the effects of credit cycles. However, a good bankruptcy regime acts as a backstop during downswings… India’s growth aspirations require capital to operate at the frontiers of productivity and efficiency. An efficient bankruptcy system will free up capital, allowing better production, employment, and growth prospects,” it said.
The Economic Survey’s growth projections and the accompanying commentary comes at a time when the government is looking to engineer a quick rebound in the economy that has entered a slow lane.
The National Statistical Office (NSO) on January 7 projected that India’s real GDP growth for 2024-25 at 6.4 per cent, the slowest in four years, characterised by high inflation, wobbly capital flows and a widening trade gap. India’s GDP grew 8.2 per cent in 2023-24.
India’s real or inflation-adjusted GDP) grew 5.4 per cent in the second quarter (July-September), the slowest in seven quarters, reminiscent of 2019 when growth had slowed to 4.7 per cent in the second quarter.
This is a sharp moderation from the 8.1 per cent growth in the second quarter of 2023-24, and 6.7 per cent expansion in the first quarter (April-June) of 2024-25.
India’s GDP grew 8.2 per cent in 2023-24.
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