Reforms Needed To Overcome Slowdown. Is India Up To It?

The Economic Survey tabled on Friday in Parliament indicated that GDP growth is expected to taper down from 8.2 per cent in the financial year 2023-24 to 6.4 per cent this year, and remain modest at 6.3-6.8 per cent in FY25-26.

While this growth rate will still remain one of the highest globally, the problem with lower growth in India’s output is that to achieve Prime Minister Narendra Modi’s ambition of making India a developed nation by 2047 — some 22 years from now — the economy needs to grow at a steady 8 per cent annually.

“While the desirability of this growth rate (8 per cent per annum) is unquestionable, it's important to recognise that the global environment — political and economic — will influence India's growth outcomes,” the Economic Survey stated. 

The report, prepared by Chief Economic Adviser V Anantha Nageswaran and his team in the Finance Ministry, also went on to warn that, “Headwinds to growth include elevated geopolitical and trade uncertainties, and possible commodity price shocks.”

Tariff Threats Weigh In

Almost in tandem with that analysis, the threat that US President Donald Trump may slap fresh trade tariffs weighed heavily on the forex market, and the Rupee fell to an all-time low of 86.65 to the US dollar on Friday, a day ahead of the Budget.

Trump’s threats, to impose trade tariffs and cut visas, probably saw the Rupee fare far worse than other major Asian currencies like the Chinese Yuan, the Korean Won, Indonesian Rupiah, Malaysian Ringgit and Thai Baht. According to sources, the Reserve Bank of India asked State-run banks to sell US dollars to try stall the slide in rupee value.

The Survey noted: “Overall, India will need to improve its global competitiveness through grassroots-level structural reforms and deregulation to reinforce its medium-term growth potential.”

Among major economies, India has one of the lowest productivity rates globally, at US$ 8 per worker per hour, compared to US$ 15 in China, US$ 17 in Brazil, US$ 42 in Japan and US$ 70 in the USA.

Cut Taxes, Energise Savings

To improve India’s productivity, the country, of course,  has to invest in social capital by skilling its workforce and making it healthier. This means spending much more on education, skilling, and the national health infrastructure. Tomorrow’s Budget will show how and whether that will be done.

Equally importantly, more factories and new technologies will have to be brought in. To do so, the government must cut red tape, energise savings — which can be channelised into investment — and create demand for the new goods and services.

Many are looking forward to a juggling of tax rates, especially for the middle classes, which should increase disposable income and potential savings. In turn, this should increase both consumer demand and investible resources. Whether Finance Minister Nirmala Sitharaman will live up to those expectations is something only time will tell.

However, indications in the Economic Survey are that the government is taking its role as a catalyst for business seriously, and may go for a spate of deregulation measures.

Another Spate Of Reforms?

Whispers in the corridors of power have it that North Bloc may take up systematic deregulation by liberalising standards and controls, and designing new policy prescriptions that reduce the cost of economic activity.

Nageswaran emphasised: “India must pursue economic growth by undertaking policy actions that enhance economic freedom, i.e. citizens' unhindered ability to pursue legitimate economic and entrepreneurial aspirations.”

It is well known that deregulation is more critical for MSME growth than for large enterprises. Compliance costs in terms of time and financial resources are major issues for MSMEs, which have limited capacities and resources to comply with the numerous laws and regulations that fetter industry.

However, added to what India must do to expand its domestic market, is its impending battle to expand its global share of the merchandise marketplace (from a current 2 per cent) and the services market (from a current 4 per cent) to 15 per cent each over the next two decades.

Elephant Vs Dragon

This is where the Elephant will have to contend with the Dragon in the room. The rise of China as a manufacturing power has led to a world where other nations have adopted defensive practices including raising trade barriers to protect their home-grown industries. Between 2020 and 2024, more than 24,000 new restrictions have been implemented worldwide, the Survey points out.

This shift in structural dynamics has significantly slowed global trade growth. There are early indications of long-term global economic stagnation that can affect India’s own trading efforts.

China has emerged as a dominant force in global manufacturing, leveraging its competitiveness and strategic economic policies to secure control over critical resources essential to global supply chains.

By the turn of the century, the US and its allies accounted for the vast majority of global industrial production, while China’s share stood at just 6 per cent. But within three decades — by 2030 — UNIDO projects that China will command 45 per cent of global manufacturing. Such dominance by a single nation has occurred only twice before in history: By the UK at the onset of its Industrial Revolution, and by the US following World War II.

Under these circumstances, it is doubtful if the world will be in a mood to see the rise of another manufacturing giant — in this case, India — on the global stage. In the years ahead, getting the world to accept its rise will be the real challenge for policymakers.