Slow but Steady

In common parlance, a slowdown is often misunderstood as a prelude to recession, while effectively, it is only a natural phase in every economy. Apparently, today, fears of recession are pushing investors to the edge as stock markets continue to plummet, reinforcing the inevitable. When falling GDP rates across nations, soaring inflation, and decreased consumer spending signify a slowdown, geopolitical tensions and trade wars add fuel to the ‘fear.’ Even as the World Bank and the IMF have long warned that global GDP will decline from 3.4 per cent in 2022 to 2.8 per cent in 2023, a sharp decline in the ISM Manufacturing Index to 46.80 in August last year, coupled with a three-year-high unemployment rate of 4.3 per cent in the United States, prompted economists to forecast a prolonged slowdown culminating in a recession.

In the Indian context, the slowdown is believed to be due to slower corporate investment and a weak manufacturing sector, which has retarded GDP growth to 6.4 per cent in 2024—the slowest in four years. Stagnation in wage growth has also led to a decrease in urban consumption, combined with high food inflation at 8.3 per cent. Morgan Stanley, the US-based investment bank, says that, among other factors, a substantial reduction in government spending—which accounts for 28 per cent of India’s GDP—between April and September 2024 contributed to the slowdown. The IMF estimates India's Debt-to-GDP ratio (including state government debts) at 82.6 per cent in 2024-25. A reduction in FDI (from USD 85 billion in 2023 to USD 479 million in 2024), repatriation of funds, and outbound investments have further deepened fears of a slowdown, if not a complete recession.

However, a slowdown is a self-regulating feature for corrections, with no necessary implications of an imminent recession. Recessions occur largely due to the bursting of economic bubbles, such as the dot-com bubble in the 1990s, the housing market bubble in 2008 in the US, and the cryptocurrency bubble in El Salvador, which can devastate economies. The current slowdown is more global than local, driven by factors such as geopolitical conflicts and trade wars. Whether recession hits the global economy or not is a matter of speculation; and even if it does, India’s economy will not be impacted, at least in the immediate run, since India’s fundamentals are relatively stronger than many countries if the experience of the global meltdown in 2008 serves as an example.

Despite global uncertainties, a steady growth pattern has been observed in India, as the real GDP growth rate of 6.4 per cent remains close to the decadal average and is expected to be between 6.3 per cent and 6.8 per cent in 2026. With regard to aggregate demand, private consumption expenditure is expected to grow by 7.3 per cent at constant prices, especially driven by a revival in rural demand. According to official data, India’s overall exports grew by 6.0 per cent year-on-year during April–December 2024. Importantly, growth in service exports, which constitute more than half of India’s overall exports, surged to 12.8 per cent in April–November 2024, up from 5.7 per cent in 2023. This contributed to an increase in foreign exchange reserves to USD 640.3 billion by December 2024, which is believed to be sufficient to cover more than 10 months of imports and about 90 per cent of external debt. India’s robust services exports have helped the country secure the seventh-largest share globally, vindicating its capabilities and competitiveness. Moreover, apart from the services trade surplus, a healthy net inflow through remittances from abroad is an advantage, making India the top recipient of remittances in the world. These twin factors, experts say, help contain the current account deficit at 1.2 per cent of GDP in the second quarter of FY2025.

In terms of food production, India is poised for a better position in food security now, thanks to a good monsoon last year and a bumper harvest reaching 1,647.05 LMT—an increase of 89.37 LMT over 2023. The agriculture sector is projected to grow at 3.8 per cent in 2025, with horticulture, livestock, and fisheries as key drivers of growth. Secondly, retail headline inflation has softened from 5.4 per cent in FY24 to 4.9 per cent in April–December 2024. However, the increase in food inflation, from 7.5 per cent in FY24 to 8.4 per cent in FY25 (April–December, CFPI), remains a concern.

The industrial sector, of course, slowed down in 2024–25 due to factors like weak demand from importing countries and disruptions in mining, construction, and manufacturing owing to an above-average monsoon. However, it is estimated to grow by 6.2 per cent in the financial year 2025–26. Meanwhile, capital expenditure grew by 8.2 per cent during July–November 2024 (YoY), and gross tax revenue (GTR) increased by 10.7 per cent during April–November 2024. As such, deficit indicators remain comfortable, leaving enough room for developmental and capital expenditure in FY2025–26, according to the Economic Survey.

According to Morgan Stanley, India’s economy is set to bounce back. Tackling inflation, enhancing government spending, and reviving the job market are crucial to economic recovery. The Economic Survey 2025 suggests that systemic deregulation, enabling a paradigm of economic freedom for businesses and organisations, will reinvigorate internal energies and domestic growth levels. It underscores that reforms and policies must focus on systemic deregulation under ‘Ease of Business 2.0’ to facilitate the creation of a viable Mittelstand (SME sector). However, building confidence among FIIs and ensuring a continuous inflow of FDI is essential. According to Deloitte, a consulting firm, more than 50 per cent of the world’s Global Capability Centres (GCCs) are in India, engaged in R&D, engineering design, and consulting services, employing up to 2 million highly skilled workers and generating USD 46 billion in revenue.

The Economic Survey also suggests that, domestically, order books of the private capital goods sector need to translate into sustained investment pick-up, alongside building consumer confidence and ensuring wage growth. Encouraging rural demand and easing food inflation are equally important. Rightly so, the Union Budget 2025–26 focuses on accelerating growth, securing inclusive development, invigorating private sector investments, uplifting sentiment, and enhancing the spending power of the middle class. Treating agriculture as the first engine of growth, allocations were increased from Rs 1.41 trillion in FY25 (RE) to Rs 1.71 trillion in FY25 (BE), up by 21 per cent. However, emphasis is required on diversified high-value production, better farm incomes, and marketing and trade reforms. Similarly, the MSME sector, considered the second engine of growth, was given a generous credit guarantee increase from Rs 5 crore to Rs 10 crore, along with several other benefits. Investment in HRD, the economy, and innovation is treated as the third engine, with liberal allocations across various heads, including AI.

The Indian economy is poised to sail through the current slowdown. However, we need to be watchful with regard to the fiscal deficit and Debt-to-GDP ratio; debt should be an ultimate recourse, not a primary resource. To address the fiscal deficit, a consensus across party lines regarding spending on freebies could be highly beneficial. Finally, efforts should continue toward creating more jobs and raising household incomes, as they are necessary to sustain demand.

The writer is a former Addl. Chief Secretary of Chhattisgarh. Views expressed are personal