In 2025, where growth will come from

With the new year around the corner, it is useful to think ahead and ask: What is going to be the big economic issue in India in 2025? There is little doubt that it is going to be the growth slowdown.

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For a rich country like the US with an annual per capita GDP of $86,000, slowing growth does not hurt a lot. But for a poor country like India, with a per capita GDP of only $2,700, slowdowns are painful and worrisome. To become an advanced country, India will need to grow rapidly for a long period of time. And this is not easy. Only a handful of countries have made it into the elite club. In order to have a good shot at it, India will need a coherent and well-defined growth strategy.

The recently released GDP growth figures have triggered much discussion over whether the slowdown is merely a temporary blip or a warning of a more serious trend. Official statistics show that growth has declined in four out of the last five quarters. In the middle of 2023, the economy was growing at a healthy rate of more than 8 per cent. But by the September 2024 quarter, growth had fallen to less than 5.5 per cent. Official data is plagued by measurement issues, but this slide does seem to reflect the reality because it is confirmed by several high frequency indicators. Clearly, there is a growth problem. There are also no evident drivers that could reignite the engine of high growth. Consumption demand has been subdued, especially in urban India. Partly as a consequence, private investment has been weak, even though corporate balance sheets are healthy. After all, what is the point of building more factories when existing ones still have plenty of unused capacity? While government investment has been growing rapidly over the past few years, propping up demand, it is soon going to run into fiscal constraints.