Munish Gupta
India is well on way to becoming the world’s third-largest economy by 2028, expanding to $5.7 trillion and overtaking Germany, according to a report by US multinational investment and financial services company Morgan Stanley.
“The implication is that India will be the world’s most sought-after consumer market, it will undergo a major energy transition, credit-to-GDP will rise and manufacturing could gain share in GDP,” says the report.
This augurs well in the backdrop of three sets of recent data that present the interplay between India’s real economy and the financial markets.
February’s 3.61 pc retail inflation would come as a relief to policymakers as it is well within the RBI’s medium-term inflation target of 4 per cent. January’s industrial production at an eight-month high of 5 pc, up from December’s 3.55 pc, is another indicator of the resilience in the real economy.
Meanwhile, the panic among retail investors was palpable from the February equity mutual funds (MF) reporting numbers.
Short-term impact
To be realistic, tariffs and a potential global slowdown are likely to hurt India’s economy in the short term. The sectors where India has the highest tariff differential with the US are agriculture, autos, and pharmaceuticals. There could be an indirect impact too. Global uncertainties could weigh on foreign direct investments (FDI), including those heading to India.
But the country has the capacity and the political will to turn this challenging backdrop into an opportunity in the medium term. In the past, India has reformed best during periods of crisis. It does not have to look too far for models to emulate; its success in services exports demonstrates the power of moving up the value chain.
Perhaps a similar learning-by-doing process while moving up the value chain will help manufacturing too. The pronouncements of Prime Minister Narendra Modi in his third term have made it clear that India is determined to push it growth momentum and take hard decisions, if needed.
Economic activity
The latest GDP data released by the National Statistics Office has implicitly pegged gross value added (GVA) to grow at 6.8 per cent in the fourth quarter of 2024-25, from 6.2 per cent in the third quarter. Economic activity, as measured by the ICRA Business Activity Monitor, rose to 9.2 per cent in January, from 6.8 per cent in December.
The domestic environment is conducive for private capital expenditure, with consumption set to improve. The outlook for investment activity also seems relatively favourable. Last week, Moody’s Ratings characterised the slowdown in India’s growth in mid-2024 as “temporary” and said it was expected to reaccelerate and record one of the fastest rates among large economies globally.
