The much-touted economic strength of India has come into question. Not just because of reports of GDP overestimation but the future trend of growth, hampered by geopolitical conditions and the rising prices of oil and gas. Stagnant real wages and somewhat static manufacturing growth data revealed that consumption as well as every macro-economic indicator, has been growing more slowly over time.
It would thus not be wrong to say that if real growth was overestimated over the last decade or so, then total GDP is smaller than what has been revealed. So, it would not be prudent to say that we are the 4th largest economy, as claimed. Going by government statistics, the average real growth rate over the last decade, excluding the Covid fall and spike has been just 6 per cent. But taking into consideration the decline in consumption, private investment and sales over the past decade, it is amply clear that India’s growth story faces a demand problem. Moreover, in the present geopolitical situation, it is doubtful if the 6 per cent figure would be reached in the current fiscal.
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Economists expect the government may not be able to meet its fiscal goals with Standard Chartered expecting a slippage of 0.7-0.9 percentage points of GDP. Meanwhile Prof. Deepanshu Mohan an economist at the O.P. Jindal University in an interview stated that India may have to course correct in its geopolitical alignments to strengthen food and energy security for sustained economic growth. If there is over inter-dependence on the US, specially led by President Donald Trump, it could harm the Indian economy. Painting rosy pictures of the Indian economy in the long-term may be a strategy but what will happen in the coming two years is a big challenge before us.
At present, the RBI faces a delicate balancing act between supporting economic growth and containing inflation as external shocks from the West Asan conflict disrupt macro-economic stability. With crude prices surging and supply chains under strain, the RBI decided to adopt a ‘wait and watch’ policy and kept the repo rate unchanged at 5.25 per cent while maintaining its neutral stance.
Meanwhile, what is needed at this juncture is strengthening the manufacturing base for which all types of support, specially highlevels of infrastructure are necessary coupled with induction of cost-effective modern technology. Though India is not lagging, manufacturing has to be geared up in a big way for which research has to be encouraged to innovate and help accelerate the process. Whatever strategy India adopts, the challenge on the economic front remains due to geopolitical conditions.
There is no doubt that the economy is becoming fragile and recovery in the short-term appears quite unlikely. Analysts are of the opinion that with oil prices touching ranging above $110 a few days ago the ceasefire brought it down to $90 presently. Even then, there are expectations that petrol and diesel prices may rise after the recent state elections.
Meanwhile, the government has cut special additional excise duty on petrol and diesel by `10 per litre each to limit OMC under-recoveries, reimposed windfall taxes on exports and granted customs duty relief on select petrochemical inputs until June 2026. Government officials are considering austerity measures, including spending curbs in ministries with installed capacity to use allotted funds though spending on roads, railways and airports is expected may not be affected to sustain the growth momentum.
Meanwhile, as some analysts predicted, the much-awaited truce has not materialised as demands of both Washington and Tehran remained poles apart and may be difficult to reconcile, even in the near future. In such a situation, the Hormuz blockade will have serious consequences for the Indian economy. Though the RBI recently stated that crude oil prices may average $85 per barrel, this may not happen in the first quarter of this fiscal, which is expected to be challenging in view of the global situation. As the RBI governor rightly observed, it would be prudent to watch the changing circumstances and the evolving growth-inflation outlook.
