The Indian economy, once riding high on post-pandemic recovery, now finds itself at a crossroads as it steps into 2025. Signs of deceleration have tempered a promising growth story marked by resilience and opportunity. As the global economic environment remains fraught with uncertainties, the outlook for India’s economy presents a complex mix of hope, challenges, and the need for decisive action.
India’s economy has undoubtedly demonstrated strong fundamentals. The country has weathered global economic headwinds better than many peers, supported by stable financial institutions, prudent macroeconomic management, and healthy corporate balance sheets.
Its services sector, robust domestic demand, and youthful population remain major growth drivers. The rise of Global Capability Centres (GCCs) has cemented India’s position as a global hub for high-end outsourcing and innovation.
However, despite these bright spots, the latest numbers suggest a slowdown. Between July and September 2024, GDP growth slumped to a past seven-quarter low of 5.4%, significantly below the Reserve Bank of India’s (RBI) forecast of 7%. This raises an important question: is India’s economy truly losing steam, or is this just a temporary blip?
The growth decline from the previous quarter’s 6.7% reflects a broad-based weakening, particularly in urban consumption—a cornerstone of India’s GDP.
Elevated food prices, high borrowing costs, and stagnant real wage growth have weighed on private consumption, which accounts for 60% of GDP.
Urban demand struggles, even as rural demand shows modest recovery. Inflation pressures and muted wage growth have eroded purchasing power, raising concerns over the sustainability of consumption-driven growth.
India’s stock market has been a beacon of hope, outperforming emerging market peers in 2024. The MSCI India Index delivered a remarkable 19.5% return, far outpacing the MSCI Emerging Markets Index’s 8.3%. Midcap and small-cap stocks, in particular, have shown stellar growth, driven largely by strong investor sentiment.
But there’s a catch. This optimism isn’t entirely grounded in earnings growth. Valuations across segments, especially in midcaps and small-caps, remain stretched. A correction could happen if corporate earnings fail to meet lofty expectations. The RBI’s Financial Stability Report warns that sustaining these high valuations will require earnings growth of over 14%, which seems increasingly unlikely given current trends.
India’s banking system has improved, with the gross NPA ratio falling to a 12-year low of 2.6%. However, the story is more complicated beneath the surface. Retail loans are becoming a growing concern, with unsecured loans accounting for over half of new NPAs. Stress indicators like Special Mention Account (SMA) loans are rising, particularly for large borrowers.
The shift from low-cost CASA (Current Account Savings Account) deposits to higher-cost term deposits squeezes banks’ net interest margins. While return on equity and assets has improved, the reliance on higher-cost funding and increasing write-offs raises questions about the sector’s underlying health.
India’s economy continues to operate in a “two-speed trajectory.” The old economy, which includes agriculture, small and medium enterprises, and traditional industries, struggles under the weight of structural inefficiencies and delayed reforms. Meanwhile, the new economy, driven by services exports and innovation, has seen strong post-pandemic growth but is now losing steam as urban spending normalises.
The boom in high-value services exports—such as IT, research, and development—fuelled urban consumption for years. However, with this growth tapering, the broader economy lacks a comparable catalyst to sustain momentum. The absence of meaningful private investment and job creation exacerbates this divide, slowing economic recovery.
India’s high tariffs, which have risen from 5% in 2013–14 to 17%, pose another challenge. While intended to protect domestic industries, these tariffs have hindered India’s integration into global value chains, making exports less competitive. This policy stance has limited India’s share in global trade, particularly in manufacturing exports.
The central bank’s decision to shore up the currency by selling forex reserves has also tightened liquidity, creating additional hurdles for growth. Critics argue that a more competitive exchange rate could benefit exports, but the optics of a weaker currency seem to outweigh economic pragmatism.
The government has maintained that the recent slowdown is not systemic. Officials attribute the GDP dip to reduced public spending in an election-focused quarter and anticipate a rebound in the coming months. Capital expenditure is expected to pick up, and the festive season has already provided a short-term boost to consumption. Infrastructure projects, targeted subsidies, and employment schemes remain focal points for driving long-term growth.
Despite these efforts, concerns persist. With only 37.3% of its capital expenditure target utilised in the first half of FY25, the government must accelerate spending to meet ambitious growth targets. Structural challenges in wages, inflation, and private investment require urgent attention.
Amidst the challenges, there are reasons for cautious optimism. Projections from several institutions suggest India’s GDP could grow by 6.5%–6.8% in FY25, supported by:
The outlook for 2025 depends on how effectively India addresses its economic challenges. Key priorities include:
India’s economy remains resilient, but resilience alone cannot drive sustained growth. The coming year presents an opportunity to address longstanding inefficiencies, foster innovation, and build a more inclusive growth model. While global uncertainties pose risks, they also open doors for India to strengthen its position in international supply chains.
2025 will be a defining year for India’s economy—a test of whether it can turn challenges into opportunities and continue its journey toward becoming the world’s third-largest economy. Success will depend on striking the right balance between optimism and pragmatism, ensuring that growth benefits all segments of society.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
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