Context
The World Bank revised India’s FY25 growth projection to 7%, up from 6.6%, despite the US partially ending preferential trade treatment. This reflects India’s robust economic performance, following an 8.2% GDP growth last year, making it one of the fastest-growing major economies alongside China.
Factors Driving Growth
- Infrastructure Investments: One of the primary drivers of India’s upgraded growth forecast is the significant increase in public infrastructure investment. The government has prioritized infrastructure development, which has stimulated economic activity and attracted private investments. This focus on infrastructure is expected to create a multiplier effect, enhancing productivity across various sectors and facilitating smoother logistics and trade.
- Household Investment in Real Estate: Another reason can be the rise up of household investments over land. Investments in real estate have been forecast to underpin economic growth as urbanisation carries on with demand for housing increasing. This is particularly important as India’s urban population grows, increasing the requirement for better quality housing and services.
- Robust Manufacturing and Services Sector: The manufacturing sector has proved to be highly robust, having grown at the previous year rate of 9. core per cent during the last fiscal. That buoyant services sector has been a counter to agri underperformance in GDP growth. According to the World Bank, this underscores a strong performance in service activity and is likely due to persistent structural change in services.
Economic Challenges
- Youth Unemployment: While that is a positive sign, the World Bank report raised red flags on unemployment challenges despite growth prospects; notably with regard to urban youth jobless rate stuck at 17%. This prevailing problem engenders both social instability and economic inefficiency, requiring a focus on creating jobs and developing alternative skills.
- Decline in Global Market Share: This is further manifest in the loss of India’s global market share in the more labor-intensive industries such as apparel and footwear. India’s share of global apparel exports has declined from 4% in 2018 to 3% in 2022, due to increasing costs of production and falling productivity. The solution to this problem will be important for sustained growth and jobs from trade.
- Current Account Deficit: World Bank estimates are steadily increasing in the current account deficit in India-from 1.1% of GDP in FY25 to 1.6% by FY27. It exposes the external sector to vulnerabilities in an increasingly protectionist and trade barrier-ridden international environment.
Medium-Term Outlook
- Continued Growth Projections: Looking ahead, the World Bank maintains a positive medium-term outlook for India, projecting growth rates of 6.7% for FY26 and 6.9% for FY27. This sustained growth is expected to be supported by ongoing infrastructure investments and a gradual recovery in global demand. The report emphasizes the importance of diversifying India’s export basket and leveraging global value chains to achieve ambitious targets, such as reaching $1 trillion in merchandise exports by 2030.
- Debt-to-GDP Ratio: The World Bank also projects a gradual decline in India’s debt-to-GDP ratio, from 83.9% in FY24 to 82% by FY27. This reduction is indicative of improved fiscal management and revenue growth, which could enhance investor confidence and support further economic expansion.
Strategic Recommendations
- Diversification of Exports: India must diversify its export basket beyond traditional sectors like textiles and apparel, expanding into areas such as electronics and green technology to boost resilience and job creation.
- Enhancing Global Value Chain Integration: Deeper integration into global value chains, supported by the National Logistics Policy (NLP) and digital initiatives, can improve trade competitiveness, attract foreign investment, and spur economic growth.
- Addressing Urban Youth Unemployment: Targeted policies for skill development and entrepreneurship, along with vocational training programs, are essential to tackle high urban youth unemployment and unlock the potential of India’s young workforce.
Conclusion
The World Bank’s upgrade of India’s growth forecast to 7% for FY25 reflects the country’s robust economic momentum, driven by infrastructure investments and household spending in real estate. While challenges such as high youth unemployment and declining shares in labour-intensive industries persist, the medium-term outlook remains positive. Strategic initiatives aimed at diversifying exports and integrating into global value chains will be essential for sustaining growth and enhancing India’s economic resilience in the coming years.
Source: NDTV