India’s Economic Challenges in 2025: Key Reforms To Sustained Growth

Syllabus: GS3/Indian Economy

Context

• As India steps into 2025, its growth trajectory, while promising, faces several challenges that need to be addressed through comprehensive reforms to ensure sustained growth.

Economic Landscape of India (2025)

• GDP Growth: Over the past three years, the Indian economy performed well above expectations, growing at 8.7% in FY22, 7.2% in FY23, and 8.2% in FY24, driven by public capital expenditure, substantial investments in Global Capability Centres (GCCs), and surging service exports.
  • It slowed to 5.4% in the Q2 of the fiscal year 2024-25, a significant drop from the previous quarters that has been attributed to a combination of global geopolitical tensions, domestic inflation, and cautious private sector investment. 
• Fiscal Prudence: According to the IMF, a projected decline in fiscal deficit from 6.4% to 5.9% of GDP in FY24 will stabilize public debt at around 83% of GDP — a promising indicator of sustainability, given India’s growth outlook.
  • The fiscal deficit target of 4.5% for FY2025-26 may allow room for increased government spending.
• Government Spending: Increased government expenditure, particularly in infrastructure and social sectors, is expected to boost economic activity.
  • The recent reduction in the Cash Reserve Ratio (CRR) by the RBI has freed up funds for banks to lend, stimulating investment.
• Capital Expenditure: The Union Budget 2023-24 allocated ₹10 lakh crore for capital investment, representing 3.3% of GDP.
  • National Infrastructure Pipeline (NIP) aims to invest ₹111 lakh crore in infrastructure projects by 2025, covering sectors like energy, roads, railways, and urban development.

Key Concerns

• Geopolitical Headwinds: Global economic uncertainties, such as US policy shifts and geopolitical tensions, pose additional risks.
  • Changes in US economic policies, including fiscal measures and interest rates, can have a significant impact on India’s economy.
  • Additionally, global trade dynamics and commodity prices can influence India’s inflation and growth prospects.
• Savings-investment Gap: The RBI’s latest Financial Stability Report shows net financial savings of households fell to 5.3% of GDP in FY23 from 7.3% in FY22, sharply below the 8% average of the previous decade.
• Fiscal Prudence: The RBI has flagged concerns over a sharp increase in expenditure by states on various subsidies, including farm loan waivers and cash transfers.
• Other concerns are private sector investment, employment generation and economic disparities etc.

Key Reforms and Initiatives

• Goods and Services Tax (GST): It unified the country into a single market, simplifying the tax structure and boosting revenue collections.
  • In FY 2023-24, GST collections soared to ₹20.18 lakh crore, averaging ₹1.68 lakh crore monthly.
• Digital India initiative: It has been a game-changer, driving technological adoption and innovation across sectors.
  • It has not only enhanced governance but also spurred the growth of over 150,000 startups, creating more than 1.5 million jobs.
• Financial Inclusion and Poverty Reduction: The Pradhan Mantri Jan Dhan Yojana (PMJDY) has transformed access to banking services, with over 53 crore accounts opened by October 2024.
  • It has brought millions of previously unbanked individuals into the formal financial fold, reducing economic inequality.
  • According to NITI Aayog’s report, 24.82 crore people have escaped multidimensional poverty between 2013-14 and 2022-23.
• Market Performance and Investor Confidence: India’s market performance has been exceptional, with benchmark indices rising 28% in FY 2023-24 while maintaining low volatility.
  • It has bolstered investor confidence, attracting significant foreign investments and further strengthening the economy.

Suggested Reforms for Sustained Economic Growth in India

• Human Capital Development: Investing in human capital is crucial for boosting labor productivity and overall economic growth.
  • It involves improving the quality of education, enhancing skill development programs, and ensuring access to basic healthcare. 
  • The Global Human Capital Report highlights India’s need to improve its human resource capital, which is essential for competing globally.
• Technological Advancements: Embracing technology is vital for increasing productivity and fostering innovation.
  • Enhancing technology readiness can significantly contribute to economic growth by improving efficiency across various sectors.
• Labor Market Reforms: Reforming labor laws to make them more flexible and industry-friendly is essential for attracting investments and creating jobs.
  • The integration of platforms like the e-Shram portal aims to provide comprehensive services to labor, including employment and skilling opportunities.
• Land and Property Reforms: Efficient land administration and urban planning are critical for sustainable development.
  • The introduction of the Unique Land Parcel Identification Number (ULPIN) and the digitization of land records are steps towards improving land management and reducing disputes.
• Financial Sector Reforms: Strengthening the financial sector is key to supporting economic growth.
  • The government plans to release a strategy document outlining the future vision for the financial sector, focusing on increasing its size, capacity, and skills.
  • Simplifying rules for Foreign Direct Investment (FDI) and promoting the use of the Indian Rupee for overseas investments are also part of this strategy.
• Tax Reforms: The Union Budget 2024-25 includes measures aimed at providing tax relief to the middle class, encouraging innovation, and fostering economic growth.
• Infrastructure Development: The Production-Linked Incentive (PLI) scheme aims to attract investments and enhance production capacity in key sectors. Developing sustainable infrastructure and promoting green technologies are also important for long-term growth.
• Promoting Inclusive Growth: Ensuring that economic growth benefits all sections of society is essential for sustainable development.
  • Government initiatives aimed at empowering the middle class, reducing poverty, and promoting social equity are critical for achieving inclusive growth.

Conclusion

• India’s path to sustained economic growth requires a multifaceted approach, focusing on human capital, technological advancements, labor market reforms, land and property management, financial sector strengthening, tax simplification, infrastructure development, and inclusive growth. 
• By implementing these key reforms, India can achieve its vision of becoming a $55 trillion economy by 2047.

Source: BS