Growth holds, but don’t lose sight of pain points

Why in the News

Several agencies have raised India’s growth forecast for this year: the Asian Development Bank (ADB) and Moody’s to 7%, and the Organisation for Economic Co-operation and Development (OECD) to 7.1%. The momentum is real, but weak private investment, steady foreign capital outflows and a falling rupee are pain points the headline numbers hide.

Why are agencies upgrading India’s growth?

1. High-frequency indicators: These are frequent readings, like tax receipts and vehicle sales, that show the economy’s direction early. The Reserve Bank of India’s (RBI) State of the Economy report finds them strong.
2. Tax and energy demand: Goods and Services Tax (GST) revenue has grown at double digits for four straight months. Electricity demand is robust and petrol consumption is healthy.
3. Industrial output: The Index of Industrial Production (IIP), a monthly measure of factory, mining and power output, grew 6.8% in the first half of the year.
4. Urban and rural demand: Passenger vehicle sales have grown fast in towns and villages alike. Two-wheeler and tractor sales are robust in rural areas, so demand is broad based.
5. The takeaway: Consumers and government spending are carrying growth for now, which is why the forecasts keep rising.

How are exports and public spending supporting growth?

1. Merchandise exports: Goods exports rose 18.5% in the first two quarters of this year. The weaker rupee is a possible reason, since it makes Indian goods cheaper abroad.
2. Public capital expenditure: The Centre’s capital expenditure (capex), spending on lasting assets such as roads and railways, grew 18% in April-August.

Why is private capital holding back?

1. Private investment cycle: There are few signs of a broad recovery in private investment, the spending by companies on new plants and machinery.
2. Stock market weakness: The Sensex, the benchmark index of large listed companies, has fallen almost 14% over the past year.
3. Foreign portfolio outflows: Foreign portfolio investors (FPIs), who buy Indian shares and bonds without taking control of firms, have pulled money out for three straight years. Outflows so far this year total $17.3 billion.
4. Rupee under pressure: The rupee has fallen around 5.5% this year to about 95.2 per dollar. Several RBI steps to support the rupee have not stopped the slide, so investor confidence needs more than defending the currency.

Challenges

1. Deficit monsoon: A weak monsoon will hurt farm output, which can weaken the rural demand now supporting growth.
2. Rising input prices: Higher input costs will squeeze company profits, which further delays private investment.
3. Imported inflation: A weaker rupee makes imports costlier, so prices rise at home. Eg. India imports most of the crude oil it uses.
4. Limits of public capex: The Centre must keep reducing its fiscal deficit, the gap between its spending and its income, so public spending cannot carry growth indefinitely.

Way Forward

1. Lower trade barriers: The Union government should cut tariffs and non-tariff barriers, curbs on trade other than import duties, so firms import inputs and export at lower cost.
2. Better business environment: The Centre and States should simplify approvals and compliance so that firms find it easier to invest.
3. Private investment push: Policy should encourage domestic and foreign private investment so that private firms take over from public capex as the driver of growth.
4. Stable rules for foreign capital: Predictable tax and regulatory policy would rebuild FPI confidence and attract foreign capital.

Conclusion

India’s growth rests on consumers and the state, and the private and foreign capital needed for the next phase is still holding back. Whether reforms on trade and the business climate revive private investment will decide if this year’s upgrades last.

Key numbers

1. FPI outflows, 2024-25: $14.6 billion.
2. FPI outflows, 2025-26: $19.6 billion.

Matching Previous Year Question

“[2015] A decrease in tax to GDP ratio of a country indicates which of the following? (1) Slowing economic growth rate (2) Less equitable distribution of national income Select the correct answer using the code given below. (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 ANSWER: (a)”