Part 1:
As coalition politics reshapes governance and global tensions mount, India’s economy balances cautious optimism with emerging challenges in the run-up to FY 2024-25.
January brings a wave of positivity and hope for everyone as the new year ushers in fresh resolutions and optimistic plans for the future. Financial planning takes centre stage during this time, both at an individual and policy level. The Central Government prepares for the upcoming Budget session of Parliament, where the General Budget is discussed and adopted, setting the economic tone for the country.
The anticipation around the budget creates excitement and expectation, as people look forward to potential benefits and improvements in various sectors. Recently, Budget Day has generated significant buzz and glamour in the media corridors. Ironically, it’s said that there is an exponential rise in the number of economists in the country around this time, which subsides within a few days. One day before the General Budget, the government tables the Economic Survey, an equally critical document that doesn't receive as much attention. The Economic Survey provides an analysis of the previous year's economic performance, including in-depth analysis of various indicators and concludes with estimates and recommendations for the upcoming year. The General Budget outlines the government’s plans for the upcoming year, including financial allocations and policy measures, and estimates the revenue and expenses of the Government of India. Fundamentally, the Economic Survey serves as the basic guideline document on which the government formulates its plans in the General Budget. It is imperative to study both documents together to gain a holistic view of the Indian economy.
Before delving into the actual numbers, it is essential to set the context. The previous two financial years saw a recovery from the pandemic shocks, with very high growth rates. FY 23-24 witnessed a GDP growth of 8.2 percent, and hence, at the advent of FY 24-25, positive sentiments were at their peak. The first quarter, being an election quarter with the model code of conduct in force, saw no major policy actions by the Government. Much to everyone’s surprise, the BJP lost its majority in the results, but the NDA together garnered the majority numbers. After ten years, the country again witnessed a coalition Government, which at this stage seems stable and strong. However, coalition governments face their own limitations, and there is a risk of delays in implementing critical reforms. The government had to change gears, and the country saw some critical bills referred to the Joint Parliamentary Committee for consideration and recommendation. Against this backdrop, the RBI projected a quarter-on-quarter average growth rate of 7.2 percent, while the Economic Survey report estimated growth within a range of 6.5 percent to 7 percent.
As discussed earlier, government spending had certain limitations, focusing only on ongoing projects, which resulted in sluggish growth. The country witnessed a GDP growth rate of 6.7 percent during Q1 of FY 24-25. Compared to previous general election quarters, it was the highest rate since Q1 FY 04-05. However, Q2 FY 25 fell short of the RBI's expectations, with a growth rate of 5.4 percent, attributed to rising prices and a sluggish increase in government capital expenditure. Corporate results for Q2 were also lacklustre, creating negative sentiments in the capital markets. Rising inflation concerns prompted the RBI to maintain policy interest rates. The RBI did aggressive intervention in the currency markets which resulted into a steady Dollar exchange rate. It was evident that due to the protectionist policy of RBI the rupee has been overvalued. Recently, the RBI has stopped active intervention, and the Rupee has started depreciating. While Q3 numbers are still awaited, it is projected that Q3 will witness a bounce back in economic activity, mainly driven by the festive season.
Globally, tensions flared as the Israel-Hamas conflict escalated, with Israel launching attacks on Hezbollah in Lebanon and Iran directly confronting Israel. Despite the Middle East volatility, crude oil prices remained relatively stable, and the Russia-Ukraine war had minimal impact on India. Meanwhile, Donald Trump’s aggressive campaign for a return to power stirred global unease, promising a stronger ‘America First’ stance. Biden's tightened sanctions on Russia will disproportionately affect nations purchasing Russian crude. Combined with rising oil prices and a depreciating rupee, these factors are expected to strain India's economy in Q4, with inflation looming. The government's foreign policies, it seems, will be tested more than its economic strategies.
(The author is a Chartered Accountant and works at Authomotive Division of Mahindra and Mahindra Limited. Views personal.)
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