India’s economy recouped strongly in the aftermath of the pandemic, with real GDP growth of 8.2 per cent in FY24 driven by government capital expenditure. The economy is projected to grow 7.2 per cent in FY25 with strong macroeconomic fundamentals. Forex reserves reached a record high of $700 billion in October, strengthening India’s ability to manage external shocks. Headline inflation fell significantly from 5.08 per cent in June to 3.54 per cent in July, easing inflationary pressure.

However, in the current fiscal, FIIs’ net outflows were ₹1.78 lakh crore. The current account deficit of $9.7 billion in Q1FY25 from surplus in the previous quarter is a sign of poor export performance. Previously, India saved $2.7 billion by purchasing discounted Russian oil, which alleviated the pressure on the trade deficit.

Rupee stability

Recently, the RBI advised major banks to refrain from increasing their current positions against the rupee to stabilise the rupee. A weaker rupee makes imports (crude petroleum, coal, electronics, chemicals, lithium-ion batteries, etc.) costlier, raising the price of imported crude which accounts for approximately 25 pet cent of India’s gross imports.

It is projected that India’s current account deficit may increase. It is important to boost domestic consumption and investment as much of the global economy is in trouble due to protectionism and geopolitical conflict. Private final consumption expenditure growth needs to improve from the low of FY24. What ails private investment is demand shortage. The time is ripe to address both the demand drivers and derived demand problems.

The stability of the rupee is crucial as import dependence continues in critical sectors. Long-term measures such as currency swap agreements with major trading partners can stabilise the impact of exchange rate volatility, mitigate capital outflows, and build economic resilience. Global headwinds are not only via financial markets but also through the trade channels as export restrictions are rising in the West on climatic grounds. To remain competitive, sustained private sector investment is needed including in MSMEs. Manufacturing investment currently enjoys lower corporate tax rates and the benefits of several government schemes. The conditions are in India’s favour but it needs to be capitalised across sectors.

According to a recent RBI paper, the private capital expenditure is expected to grow by 54 per cent, reaching ₹2.45 lakh crore for FY24-25 as against ₹1.59 lakh crore for FY23-24.

Gupta, Das are researchers and faculty of economics, respectively, at Birla Institute of Management Technology. Views are personal

Related Topics