The Indian economy is at that very critical juncture in 2024, with growth aspirations amidst persistent inflationary pressures in an uncertain global and domestic environment. In this background, the recent move of the MPC to retain the repo rate at 6.5%, along with the SDF rate at 6.25% and the MSF rate at 6.75%, is calibrated. The concept has been coined to stabilize the economy in a way that inflation is put under control without hampering growth in key sectors of the economy such as agriculture, industry, and services.
The surprise downwards, the Q2 FY2024-25 GDP growth at 5.4%, was robust across services, especially trade, transport, and communication, on strong consumer demand during the festive season; has underpinned strong growth projections of 6.6% in FY2024-25. On the other hand, manufacturing remained in a tight position, with industrial production cooling down significantly to 2.1% in Q2 from 7.4% in Q1, mainly because of the weaker performance of the key sectors such as petroleum, steel, and cement. This, however, may be helped by the government-sponsored initiatives such as the PLI schemes in the high-value sector, like electronics, textiles, and automotive.
Inflation is still, of course, a concern. Therefore, on one hand, the increase of headline CPI inflation to 6.2 percent in October-and particularly, food inflation at 9.7 percent-strongly revived upward pressures emanating essentially from vegetable-related items, cereals, and edible oils, which impact directly household consumption and especially at the rural level, wherein food constitutes a sizeable chunk of household budgets. While the kharif harvest may ease food inflation pressures, the risks are high at this juncture considering the rising global commodity price pressures, weather disruptions, and energy price volatility. In response, given the situation, the RBI increased the limit for collateral-free agricultural loans to ₹2 lakh per farmer-a move that would extend some succor. Though it is all that, the long-term structural challenges addressing storage infrastructure, reducing wastages, and ensuring crop diversification should be carried out in protecting the country against commodity price volatility.
Agriculture always posed a continuous challenge and an enticing opportunity in the context of food inflation.
With Kharif yields strong and the prospect bright for rabi, this is expected to be the year that will bring record production with consequent succor from food price pressures, something India needs rather urgently. This becomes possible with continued investments in modern farming techniques, improved storage facilities, and increased access to enhanced market linkages.
Diversification of crops will further cushion the sector against volatile prices caused by weather conditions across the globe that disrupt international supply chains.
Trade continues to be one of the main growth drivers. Merchandise exports of India went up by 17.2% in October ’24 and reflected competitiveness for the countries in the related sectors, including chemicals, engineering goods, and textiles. Among services, IT and business services remained relatively resilient, exporting 22.3% this October month.However, India also remains vulnerable to the recessionary effects of the global economy, due to much dependence upon the USA and Europe regarding its exports of services-and-exports that are almost subdued on account of slackening demands both in these two critical markets. Therefore, for sustained growth to take place, India needs to work towards diversification into export markets and an increment in the global footprint, particularly regarding less traditional sectors.
Another big variable still key to India’s economic fortunes has remained geopolitics at the global level. Growing tensions between Washington and Beijing with regard to trade, conflict in Russia and Ukraine, and other geopolitical risks continue to raise uncertainty and volatility around the world. All of these incidents impinge on world trade as well as carry a sense of risk in energy supply, commodity prices, and capital flow. The 1.3 percent depreciation of the Indian rupee against the US dollar in 2024 underlines some of the pressures of external origin that the economy continues to face. But dearer access to credit, together with deteriorating financial conditions in the advanced economies, raises all these risks by raising the cost of borrowing and putting additional pressure on capital flows to emerging markets such as India.
BFSI, too, is very important in the mitigation of these risks. Credit and deposit growth stood at 12.4% and 11.6%, respectively, as of November 2024. In a nutshell, such growth has kept on supporting economic activities through the much-needed financing of important sectors like agriculture, manufacturing, and infrastructures. On the other side, high inflation keeps influencing consumers’ sentiments in general, while raising interest rates weigh on consumption and investment across businesses. This, in effect, means that the recent reduction of the CRR by 50 basis points that the RBI effected should release ₹1.16 lakh crore into the banking system, improve liquidity, and ensure credit flow to MSMEs and rural businesses, which is the key ingredient in India’s economic recovery. Manufacturing is still growing at a slower rate, though it should recover in light of rising government expenditure on infrastructure. While the Manufacturing PMI readings stayed positive and indicated optimism in the recovery of the sector, these would be strong beneficiaries under electronics and automotive and are central to the PLI schemes that are important for pushing long-term growth in manufacturing. Contrarily, headwinds from rising input prices and disrupted supply chains globally keep prospects for overall industry-and particularly energy-intensive segments-very challenging.
The near-term outlook remains mixed for companies across all industries. Strong supportive government policies-the CRR reduction, higher infrastructure spending, and targeted financial inclusion-are pitted against still-high inflation, disrupted supply chains, and external geopolitical risks. For companies, especially in the manufacturing and BFSI sectors, these challenges will be answered by moving to more efficient practices, investing in technology, and diversifying supply chains that reduce the risks of global shocks. On the precautionary measures, businesses should be concerned with increasing operational resilience through the adoption of digital tools and automation in order to cut costs and boost efficiency. In the same vein, sectors like agriculture and manufacturing have to embrace sustainable methods during this ongoing price fluctuation. This means that for policymakers, further investment in infrastructure, ease of doing business, and addressing labor market inefficiencies are required for sustained economic growth.
On a go-forward basis, the outlook currently remains cautiously optimistic for India’s economy, with fiscal stimulus, supported by monetary policies and structural reforms that should help overcome the challenges in capitalizing on its strength-a service-driven economy, growing middle-class income, and strategic positioning in the world system. As India looks toward Viksit Bharat by 2047, it can hardly afford to be complacent with external risks, geopolitical instability, and increased global interest rates to upset its growth prospects. A more strategic diversification approach taken in trade, manufacturing, and financial services in a number of countries will finally be leading India on her trajectory toward competitiveness and resilience in the world economy.
By Anamika Singh, StraCon Business Services and Rohit Kumar Singh.
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