Economy
Everything That’s ‘Up’—Or Rather ‘Down’—With the Indian Economy”. The 3 Elephants In The Room
The Indian economy today is like a rollercoaster ride that doesn’t seem to know whether it’s headed for the stars or plunging into the abyss. With inflation soaring, growth projections constantly being recalibrated, and income levels struggling to keep pace with rising costs, it’s time to pause and dissect the state of the nation’s finances as we approach the 2025 budget.
Let’s break it down, one factor at a time.
The Big Question About Inflation
Inflation is back to haunt us, with retail inflation climbing to a 14-month high in October. Vegetable prices have spiraled out of control, and core inflation isn’t showing signs of cooling down either.
The Reserve Bank of India’s (RBI) monetary easing plans have been shelved as inflation breached the 6% tolerance band, hitting 6.21%. This marks the first breach in over a year, dashing hopes of an interest rate cut. Short-term interest rates remain 150 basis points higher than pre-pandemic levels, and fiscal policies are stretched thin, supporting pandemic-era welfare schemes like free food rations for 800 million Indians.
What’s the culprit? A mix of global and local factors. The war in Ukraine pushed food prices up, and while demand-side boosts from income-transfer schemes sound good politically, they’re creating inflationary pressure that supply chains aren’t ready to handle.
Growth Projections Is A Sorry Mixed Bag
On the growth front, the opinions are equally split. Optimists, like Axis Bank’s Chief Economist Neelkanth Mishra, project a robust 7% GDP growth for FY26, fueled by domestic factors such as revived capital expenditure, fiscal spending, and credit growth revival measures.
However, ground realities paint a more sobering picture.
The Reserve Bank of India recently revised the FY25 growth forecast down to 6.6%, from an earlier 7.2%. The September quarter saw GDP growth drop to a seven-quarter low of 5.4%, primarily due to weak manufacturing output and muted demand, all under the shadow of high inflation and interest rates.
Adding to the gloom, the Asian Development Bank (ADB) has further trimmed India’s growth projections for this financial year to 6.5% and has lowered expectations for FY26. Global headwinds, including trade uncertainties, high US interest rates, and China’s slowing economy, threaten to disrupt domestic momentum.
What’s worse, the structural shifts in India’s workforce underline a deeper concern. More urban migrants are returning to their villages than ever before, swelling the agrarian workforce to over 46% of the population last year, up from 42.5% in 2019. This reverse migration hints at dwindling urban opportunities, a worrying trend for an economy that aspires to be a global powerhouse.
The Challenge of Income and Wages
Now its time to address the elephant in the room – in 2019 the Indian economy found itself staring at a troubling reality – wage incomes were in such a sorry state that even a small drop in prices felt like luxury for many.
Fast forward to today, and while some things have changed, much has stubbornly stayed the same. The story of incomes and wages in India is a tale of stagnation, denial, and missed opportunities — punctuated by occasional attempts at course correction.
The Signs of Distress
If you want to understand the struggle of lower-income households, look no further than the soaring loans against gold — growing at a staggering 50% annual pace. For many, pledging their only marketable asset has become a lifeline to survive the rising costs of living.
A Whisper of Course Correction
While public statements from policymakers continue to exude confidence, behind closed doors, there’s enough worry to shuffle key decision-makers. In a surprise move, Sanjay Malhotra is set to replace Shaktikanta Das as the Reserve Bank of India (RBI) Governor. The shake-up could pave the way for a much-needed rate cut, potentially easing the central bank’s restrictive policies that have partly fueled the recent slowdown.
At 6.5%, the benchmark interest rate remains unchanged since Das first took charge in 2018. Back then, the economy was grappling with a massive bad-loan crisis in the banking sector. Today, the issue isn’t about financing but about the nature of growth itself.
Growth Without a Solid Foundation
Yes, the economy is 25% larger than it was pre-Covid, but it’s missing the output that should have materialized if GDP growth had stayed on its pre-pandemic trajectory. A major culprit? Banks prioritizing consumer loans over corporate loans. While this strategy propped up demand temporarily, it failed to create capacity for long-term growth.
Manufacturing output growth has plummeted to a dismal 2%, down from 14% a year ago. Even sectors like agriculture, which show promise due to a good harvest, can’t offset the slump in urban demand fueled by job cuts in white-collar industries like IT. Unsold cars piling up at dealerships and a surge in loans against jewelry are symptoms of deeper economic malaise.
Women at Work — But at What Cost?
India’s abysmal rate of women’s workforce participation has improved, but the numbers tell a bittersweet story. More women are now self-employed, often helping on farms or running small family businesses. While this boosts rural resilience, it doesn’t equate to steady cash earnings or financial independence.
Déjà Vu: Denial and Delayed Action
The economic slowdown of 2018-2019 saw GDP growth crash from 9% to just 3%. Back then, policymakers dismissed concerns, and it seems history is repeating itself. For the most recent quarter, output growth has slowed to a little over 5%, down from the 8%-plus pace seen in 2023. Yet, policy discussions remain mired in trivialities.
Take, for instance, the proposed 28% tax on readymade clothes priced over $120. The garment industry warns this could result in 100,000 job losses as middle-class consumers tighten their wallets or affluent buyers shop abroad. Add to this the delay in launching a flagship internship program targeting job creation in 500 top companies, and the disconnect between policy and ground realities becomes glaring.
What Can We Expect from the 2025 Budget?
As 2025 unfolds, the upcoming budget carries the weight of expectations against a backdrop of cautious optimism and tempered forecasts. Here’s what might shape the contours of India’s fiscal roadmap for 2025-26.
A Conservative Nominal GDP Growth Estimate
The Centre is likely to adopt a conservative nominal GDP growth estimate of around 9.5% for 2025-26. This approach reflects expectations of slowing inflation coupled with sustained economic activity. The nominal GDP metric, which factors in current market prices and inflation, holds critical significance as it influences fiscal deficit targets, tax buoyancy, and debt-to-GDP ratios.
This cautious projection aligns with a prudent budgeting philosophy. “It’s better to keep nominal GDP at a conservative level and beat the targets than to aim too high and miss,” according to sources familiar with budget deliberations. This strategy ensures the government maintains credibility in its fiscal planning while allowing room for positive surprises.
Lessons from 2024-25
The budget for the current fiscal year had pegged nominal GDP growth at 10.5%, but actual growth has moderated to 8.9% in the first half. Unless there’s a sharp rebound in economic activity and inflation remains elevated for the next few months, the full-year growth may fall short of projections.
Global factors, such as easing commodity prices due to concerns about a Chinese economic slowdown and energy market adjustments under Donald Trump’s U.S. administration, are expected to help temper domestic inflation. These dynamics provide the government with some fiscal breathing room as it prepares the next budget.
Real Growth Outlook
The International Monetary Fund (IMF) has estimated India’s real GDP growth for the next fiscal at 6.5%. While this aligns with longer-term growth prospects, the recent slowdown to a seven-quarter low of 5.4% in the September quarter has dampened near-term optimism. Analysts remain hopeful for a recovery in 2025-26, supported by anticipated stabilization in domestic and global economic conditions.
Key Budget Priorities
Balancing Growth and Fiscal Prudence – With nominal GDP projections leaning conservative, the budget must strike a balance between driving economic activity and adhering to fiscal discipline. Achieving deficit targets while stimulating growth will be a central theme.
Boosting Public Spending – The government may focus on infrastructure and social sector investments to catalyze demand and job creation. Expect flagship projects in housing, transportation, and rural development to receive significant allocations.
Inflation Management – While easing global commodity prices could provide relief, inflationary pressures may still necessitate targeted subsidies or interventions in food and energy markets to shield lower-income households.
Tax Policy Adjustments – The Centre could consider moderate changes to personal and corporate tax structures, aimed at enhancing compliance and improving tax buoyancy. Initiatives to broaden the Goods and Services Tax (GST) base might also feature prominently.
Addressing Employment Challenges – Programs aimed at creating formal jobs and skilling the workforce will likely receive a push, especially given the heightened focus on unemployment in recent political discourse.
The Last Bit
While the RBI has corrected its overly optimistic GDP forecast from 7.2% to 6.6% for this fiscal year, the broader policy discourse remains stuck in wishful thinking. Discussions about India becoming a developed nation by 2047 dominate the headline, while recouping the income lost over the past five years receives scant attention.
It’s time for a reality check. If India hopes to tackle its income and wage challenges, policymakers need to stop dismissing concerns and start focusing on structural reforms. A thriving economy isn’t built on denial — it’s built on honest introspection and decisive action.
The upcoming 2025 budget will likely be pivotal in addressing these pressing concerns. The government faces a tough balancing act — managing inflation, spurring economic growth, and addressing income disparities without overburdening fiscal resources.