The latest GDP data shows India’s economy is recovering, with growth rising from 5.6 percent in July-September to 6.2 percent in October-December, and an estimated 7.6 percent in January-March. At this pace, India is set to become the world’s fourth-largest economy. However, before we start celebrating, we need to examine the economic situation more carefully. Upon doing so, we’ll find significant weaknesses, indicating that substantial policy work remains.
For a start, investment remains too weak to drive rapid growth. In 2024-25, real investment is expected to rise by a mere 6 percent, trailing economic expansion. In contrast, investment during the 2004-2007 boom grew by 15 percent annually, accounting for 40 percent of GDP. Now, it stands at just 33 percent.
Even more concerning, the supposed growth acceleration disappears when considering long-term trends. For 2024-25, growth is expected to be 6.5 percent, significantly lower than the 8.8 percent average post-Covid. This is corroborated by high-frequency indicators, including slower retail sales, declining credit growth, weak corporate earnings, poor goods exports, a drop in net foreign direct investment, and a sharp fall in core inflation.
To understand the current state of the economy, we must look back a few years. Before Covid, growth had fallen below 4 percent, with the economy in poor shape. The unorganized sector struggled due to Demonetisation and poor GST implementation, while the organized sector was still recovering from excessive borrowing during the boom. Many of these issues remain unresolved. However, after Covid, they were less visible because the economy was boosted by several temporary factors.
One such factor was the normalization of activity as people returned to work and households resumed spending after the lockdown. The consumption revival was fuelled by a surge in retail credit, which grew at an annual rate of around 20 percent for several years.
A second factor was the government’s infrastructure push, with spending growing at an average rate of 30 percent between 2021-22 and 2023-24, further boosting the economy.
The most important factor, however, was the rise of a "New Economy." The growth of Global Capability Centres (GCCs) set up by multinational companies led to a remarkable 65 percent increase in service exports over the three years ending in 2023-24. The windfall income of nearly 2 million GCC workers was spent on SUVs and luxury real estate, sparking booms in the auto and construction sectors, with the latter growing in double digits in real terms in the three years ending 2023-24.
