Explained: Familiar problems linger, global uncertainties complicate picture

Indian Express

4 days ago

Helped by a late 7%-plus surge in the last quarter, India's real GDP in Financial Year 24-25 grew 6.5% on a year-on-year basis. Some tailwinds have continued on to this fiscal (FY26), with domestic economic activity exhibiting resilience in the wake of strong agri growth; some gains, albeit uneven, are seen in industrial activity; and there is continued buoyancy in the services sector.
The domestic headwinds are familiar: stubbornly indifferent private capex, weak urban consumption, patchy rural recovery, some indications of household balance sheet stress, and a negative credit impulse.
The uncertainty over tariffs imposed by the United States could weigh on global investment flows, but it also offers opportunities for India, from potential trade diversion to tapping into medium-term supply chain shifts. That said, higher tariffs and uncertainties could weigh on India's export performance as it negotiates multiple trade deals.
Continuing concerns
According to the World Bank, India's biggest supply side problem is capital expenditure, especially by the private sector — something that the BJP-led NDA government has tried hard to address over the last 11 years.
The government has more or less resolved the twin balance sheet problem by cleaning up the mess of corporate indebtedness and the bad loans on bank books.
The Goods and Services Tax (GST) introduced in 2017 unified the country's markets, while the insolvency code in 2016 offered banks a chance to resuscitate bankrupt companies.
In 2019, an unprecedented corporate tax cut was followed up with a major income tax relief in this Budget to boost consumption in the economy.
All along, the Centre has continued with the heavy lifting on capex, especially on infrastructure, in the hope that it will crowd in private investments. But to very little avail.
While companies' operating profits have surged since the corporate tax cut, capex has barely moved, with factories operating consistently at around 75% capacity over the last 11 years. Gross fixed capital formation, an investment metric, has remained at 25%, the same level as in 2014. There is now increasing concentration risk across sectors.
Companies are also scaling down their salary outlays, something that policy makers are concerned about. Analysts are flagging that growth in compensation, including hiring, has trailed the growth in profitability.
The industry states the problem as follows: consumption not growing fast enough to persuade companies to invest in new facilities or expand existing units.
Limits to intervention
The RBI has cut lending rates four times — totaling 100 basis points — since February this year. With Friday's 50 basis point cut and the change in stance to neutral from accommodative, the big question is whether the central bank thinks it has any headroom left for more rate cuts going forward.
The problem is that with the front-loading of this cut, and a possible monetary policy pause round the corner, the government too has all but expended the ammunition — having followed up its corporate tax cuts with income tax cuts earlier this year.
The view in the corridors of power in New Delhi is that there is little appetite for big reforms of any hue.
A relatively empty state election calendar in 2025 was seen as providing a window to push reforms. But with half the year gone, the appetite for initiating fresh reforms, or even restarting pending ones such as the Labour Codes, appears significantly diminished.
It is not that industry has stopped short of investing because of a paucity of funds; instead, it has done so more on account of a demand problem, and a degree of comfort in operating at a capacity utilisation of 75%. Dishing out manufacturing subsidies has its limitations, and that is now being debated internally.
From the perspective of the central bank, the last mile of disinflation that was turning out to be arduous is perhaps behind the country. Also, the rate cuts could hopefully reverse the slowing credit growth — both to households and the corporate sector.
Looking ahead
While India's long-term growth story is believed to be intact — with a 6.5% average growth rate projected over the next half-decade seen as helping the country retain the tag of the world's fastest-growing big economy — there are problems.
Countries such as China, Japan, and South Korea grew at well over 8% during their rapid growth phases on a sustained basis. Whether a 6%-plus growth would be enough for a country that needs to generate upwards of 8 million jobs every year until 2030 is a big question — as also whether this growth would be enough to bridge the growing wealth disparities and offer scope for generational mobility.
A well-intentioned internship scheme, despite its promise on paper, is struggling to take off. Jobs, consumption recovery, and private capex are festering problems.
The prognosis for 2025 is marred further by multiple external headwinds, including the uncertainties over protectionist regulations and curbs on immigration, two ongoing wars with no end in sight, and a weakening American economy that could compound the problems of a struggling Chinese economy.
If tensions with Pakistan were to be renewed, investments could be impacted. Defence spending could be forced up in the coming years.
The high-level deregulation commission in reducing compliance burden on businesses could be a net positive.
Also, the global uncertainty around trade presents an opportunity for India to lower its protectionist barriers, alongside a renewed opportunity to push much-needed investments in education and skilling.
Anil Sasi is National Business Editor with the Indian Express and writes on business and finance issues. He has worked with The Hindu Business Line and Business Standard and is an alumnus of Delhi University. ... Read More