Explained | India's economy faces slowing growth, volatile trade ahead of new financial year

New Delhi: Prime Minister Narendra Modi may seek to arrest slowing economic growth in the world's fifth-largest economy and prepare for an uncertain year of global trade when his government presents the federal budget on Feb 1.

Economists expect policy changes aimed at strengthening consumption and tariff cuts to encourage local manufacturing as ways to boost growth.

Below are some of the key economic indicators that will be considered by Finance Minister Nirmala Sitharaman while presenting the budget.

SLOWING GROWTH

A weaker manufacturing sector and slower corporate investments are seen dragging India's growth to 6.4 per cent in 2024/25, the slowest pace in four years.

Private investment is seen rising by 6.4 per cent in 2024/25, lower than 9 per cent growth in the previous year, while consumption, which accounts for nearly 58 per cent of GDP, is estimated to expand by 7.3 per cent year-on-year compared to 4 per cent in the previous fiscal year.

Weak growth in wages has impacted discretionary spending of urban middle-class Indians, according to large consumer companies on their quarterly earnings calls, even as rural demand has improved due to a strong monsoon in 2024.

The growth slowdown amid global volatility has wiped out a recent stock market rally.

INFLATION

India's retail inflation in December eased to a four-month low of 5.2 per cent, raising hopes the country's central bank would start cutting interest rates in February.

But inflation in food items, which account for nearly half of the consumption basket, continued to remain high at 8.39 per cent in December, with vegetable prices rising at an eye-watering pace of 26.56 per cent.

UNEMPLOYMENT

Modi continues to face criticism for not creating enough jobs in the world's most populous country. Government estimates of India's unemployment rate and those by private forecasters vary widely.

Government estimates show the unemployment rate for persons aged 15 years and above fell to 3.2 per cent in 2023-24 from 6 per cent in 2017-18. Private forecaster Centre for Monitoring Indian Economy (CMIE) pegs the unemployment rate in the same category at a much higher 8.05 per cent in 2023-24 compared to 7.56 per cent in the previous year.

FISCAL DEFICIT

Modi's administration is looking to contain its fiscal gap under 4.9 per cent for 2024-25 as initially targeted, and aims to bring it down below 4.5 per cent in the next financial year. The country's fiscal gap had ballooned to 9.3 per cent in 2020-21 during the pandemic.

From 2026-27, the country will move away from targeting the fiscal deficit and prioritise lowering India's debt-to-GDP ratio.

The general debt-to-GDP ratio, that includes state government debt, is estimated at 82.6 per cent in 2024-25, according to the IMF.

A roadmap to reduce the ratio will likely be released alongside the budget.

FOREIGN DIRECT INVESTMENT (FDI) FLOWS

Net foreign direct investment between April and November 2024 in the current fiscal year stood at $479 million, according to data from the Reserve Bank of India (RBI), a sharp fall compared with a net inflow of $8.5 billion a year earlier.

Repatriation of funds and outbound investments have weighed on net inflows, the RBI said in its January economic bulletin.

Even though India is trying to attract foreign investment and supply chains moving out of China, FDI inflows have been weak for a while now.

The prospects for financial flows are risk-laden, with the outlook for FDI still subdued and with portfolio flows displaying 'home bias' and high volatility, the RBI said.

TRADE, CURRENT ACCOUNT DEFICIT

India's merchandise trade deficit in April-December prose 11 per cent year-on-year to $210.77 billion, due to strong imports and weaker goods exports.

But the current account deficit in July-September narrowed marginally from a year earlier, helped by a rise in services exports that have outperformed goods shipmemts.

The current account deficit stood at $11.2 billion, or 1.2 per cent of GDP, in the quarter, compared with a deficit of $11.3 billion or 1.3 per cent of GDP in the same quarter a year ago.

Union Budget 2025 | Nirmala Sitharaman, who continues to be Finance Minister, will present her record 8th Union Budget this time. While inflation has burnt a hole in the pockets of 'aam janata', reports suggest there might be a tax relief for those making up to Rs 15 lakh per year. Track the latest coverage, live news, in-depth opinions, and analysis only on Deccan Herald. Also follow us on WhatsApp, LinkedIn, X, Facebook, YouTube, and Instagram.