Kaushik Basu, former Chief Economic Advisor of India, recently reviewed the global economic landscape and was optimistic regarding the Indian economy by opining that it is now in a “sweet spot”. The word here used in this sense means it connotes that, despite headwinds from globalization, the country now finds itself at the strongest economic phase characterized by stability in growth, rising investments, and strong domestic demand. The Basu observation reflects, then, the emerging consensus among economists that India is well-placed to keep the growth momentum even while facing serious challenges in many advanced economies.
Factors Supporting India’s Growth
1. Resilient Domestic Demand :
It is one of the major factors leading to India’s current economic performance-the resilience of domestic consumption.As gauged by RBI’s consumer confidence survey, has picked up with marked optimism about the state of employment and their income levels. Such an improvement in consumer confidence is important because private consumption accounts for 59% of India’s GDP. India’s GDP growth in the first quarter of FY 2023-24 came in at 7.8%, mainly driven by buoyant consumer spending and services sector performance. In addition, according to McKinsey’s India Economic Monitor (2023), urbanization, growing disposable incomes, and the expansion of the middle class further expand consumption in all areas-from retail and hospitality to autos.
2. Prudent Demographics:
Long considered an example of a country with a demographic advantage that greatly contributes to economic growth,. With over 65% of the population under the age of 35, India is quite poised to enjoy a demographic dividend well into the coming decades. According to UN World Population Prospects (2022), India will soon surpass China as the most populous country, with a young, working-age population that can support sustained economic growth. This big and young workforce, apart from being a major driver of consumption, provides a stable labor supply. Once again, this is a crucial factor that will fuel the growth of industry, technology, and productivity. The emerging workforce is the opportunity for India to become the manufacture hub and has established India as the destination for ‘Make in India’.
3. Digitalization and Technological Innovation:
India has experienced tremendous strides in digitalization that have increased productivity in huge industries. Revolution of the digital economy transformed the outlook of industries that range from financial services to agriculture with improvement in efficiency and accessibility. Through its report, Google and Bain & Company predict that the digital economy will be at $1 trillion by 2030, which can also be represented through e-commerce, digital payments, and new discoveries in fintech. In addition, the Digital India initiative led to increased penetration of the internet and mobile telephones, thus opening up business opportunities to previously unserved markets. UPI-a flagship digital payment initiative had managed to process over 10 billion transactions in August 2023 alone and thus indicated increased usage of the digital platforms in daily financial transactions.
4. Healthy Financial Markets and Investments:
India’s financial markets have generally remained rather immune to global economic fluctuations. Indices of growth – BSE Sensex and NSE Nifty – reflect investor confidence in the medium term. The FDI inflows into India have remained robust at $83.57 billion for the FY 2022-23. India is the world’s most attractive destination for cross-border investments. The stable macro fundamentals of India, such as a manageable fiscal deficit and adequate foreign-exchange reserves, have been somewhat helpful to go some distance for it against shocks. This has allowed the government to keep on focusing on infrastructure development and capital expenditures – probably the most powerful drivers of growth within the economy.
Global Challenges and Concerns
Despite all the optimism, Basu did remind everybody of a few challenges that India must face going ahead to sustain long-term growth.
1. Inflationary Pressures: India, like most other economies, has faced inflationary pressure due to global supply chain disruptions, rising commodity prices, and ongoing geopolitical tension in Ukraine. CPI inflation for India touched a high of 7.44% in July 2023, above the Reserve Bank of India’s upper tolerance limit of 6% ( mint ). With measures now put in place by the government on controlling prices, particularly food items, the challenge is still there, particularly for low-income families.
2. Inequality and Employment Concerns: Income inequality will continue to soar as the overall economy grows. Oxfam’s India Inequality Report published last year pointed out that the top 1% of Indians held over 40.5% of the country’s wealth, thus further solidifying social and economic inequalities. Jobs continue to be a pain point still. While the two sectors showing growth – IT and manufacturing sectors – have grown, employment in those sectors as well as the number of jobs in informal sectors and in rural populations remains a challenge. Basu stressed the need for more egalitarian policies addressing all these inequalities.
3. Global Headwinds: No country is immune to global uncertainties, and India is no exception. Slowing down in China, higher interest rates in the U.S., and disruptions in the global supply chain would create ripples in India’s exports, investments, and economic outlook. The renewed risk of global recessionary trend, as identified in the World Bank’s Global Economic Prospects (2023), may dampen growth prospects for developing economies like India.
A Balanced Perspective On the brighter side, what Kaushik Basu finds hopeful about India’s economic trajectory is that India can absorb turbulence in the global economic context better than most countries and still sustain its domestic drivers. With all these factors coming in-ample demand within, favorable demographics, growing digital infrastructure, and steadily improving financial markets-surely India is in a “sweet spot” for growth. However, the extent to which this will be sustainable depends on the success of the government in terms of managing inflation, reducing income inequalities, and sustainably driving investment in both infrastructure and human capital. Strategic policy, robust governance, and all-inclusive growth would ensure that such a “sweet spot” transforms into long-term economic prosperity as India moves into the future.
