KEEPING THE ECONOMY ON THE FAST TRACK

ACCELERATING INDIA'S GROWTH POTENTIAL IN 2025 DEMANDS REFORMS, RESILIENCE AND READINESS FOR GLOBAL UNCERTAINTIES

- NEELKANTH MISHRA

Global economic growth in the calendar year 2025 (CY2025) is currently projected to be unchanged from CY2024 at 3.2 per cent. Given that this is weaker than the growth in the prepandemic years, the gap between global incomes versus the pre-pandemic path is likely to widen further. That said, while forecast errors are common, the uncertainty on outcomes in 2025 is far more elevated. Disruption may start early, with the January 20 inauguration of the US President, who has a mandate to course-correct, if not disrupt, on trade, taxes, regulations, immigration and energy markets, among others.

His pronouncements on trade and regulations appear to be starting points for negotiation rather than set policy preferences. The very public debate within the Republican Party on the issue of immigration also shows majorities in the Senate and the Congress cannot be taken for granted. More certain is the increase in the fiscal deficit as tax cuts expiring in 2025 get extended. A worried bond market has pushed up the US government's borrowing costs, which has consequently driven up the cost of capital globally, and pulled dollars out of other markets, especially emerging economies. This has increased volatility in currency markets, which could be further amplified if Chinese policymakers devalue the renminbi against the dollar in response to tariffs likely to be imposed by the US on imports from China.

While it is reasonable to expect some easing in external conditions as the year progresses, Indian policymakers should assume elevated volatility in global financial and trade markets for some time to come. In particular, they must allow the exchange rate to be more volatile-the extraordinary stability of the Indian rupee against the US dollar can become a risk.