Opinion Donald Trump, climate change: Global threats to India’s growth story

The nature of risks is evolving with Donald Trump threatening to impose tariffs. India, which has a trade surplus with the US, will keep a close watch on these developments. Other geopolitical uncertainties await resolution. The Survey factors in these uncertainties, and presages India’s real GDP growth next fiscal year to range between 6.3 per cent and 6.8 per cent, close to Crisil’s call of 6.7 per cent.

Multilaterals have also started lowering their growth expectations for next year. The IMF foresees 6.5 per cent for this and next year, while the World Bank has forecast 6.7 per cent for next year. Despite moderation, India will see the fastest growth among

large economies.

Public and household investments have powered the post-pandemic investment recovery. However, private corporate investments have yet to show signs of a sustained increase. It is vital for the private sector to take over the investment baton from the government. The Survey notes that “the competition for investment is not only with other emerging economies but advanced economies, too, who are determined to keep their businesses at home”.

The Survey believes that in the coming years, domestic-led levers will become more important for the Indian economy. It advocates pursuing deregulation to unlock the true potential of domestic-led growth over the medium term. In the near term, we believe it would be prudent for the budget to continue supporting capital expenditure while encouraging private investments. Fiscal consolidation can proceed gradually to accommodate this spending.

The budget for this fiscal year had envisaged slower growth in capex at 17.1 per cent, compared with 28.2 per cent in 2023-24, amid normalising capital spending. It was still budgeted to grow faster than the nominal GDP, but that target is unlikely to be met given the low run rate of capital spending by the Centre and states.

However, higher allocations alone will not suffice. In addition to boosting capital spending, focus is needed on reducing cost and time overruns. As of November 2024, almost 40 per cent of the central sector projects costing Rs 150 crore over-ran both the budget and deadlines. Having shovel-ready projects and better coordination with states will help get the best bang for the buck.

India must have a clear long-term tariff policy for inputs, intermediates and final products. This will create a predictable tariff regime and have a positive impact on investment sentiment, particularly in the manufacturing sector, which India is trying to leverage as its key growth engine.

The Survey expects the food-led, higher-than-expected headline consumer inflation to decline next fiscal year. Crisil’s forecast of an average 4.4 per cent retail inflation next year is in consonance. The call assumes a normal monsoon, no major weather-led disturbances and crude oil prices around $75 per barrel. Food inflation is showing only a gradual decline. Monetary policy, which targets headline inflation, therefore, remains in thrall to high food inflation (8.4 per cent in December) – this is pushing back rate cuts. Non-food inflation was benign at 3.1 per cent.

Weather can’t be controlled. Agriculture can, however, be made resilient. Stepping up efforts in food processing and developing climate-resilient crops and cold chains for farm produce will help reduce wastage and stabilise prices.

The Survey bats for a calibrated approach to energy transition. India’s ability to manage the trade-off between high growth, energy security and energy transition needs will continue to be tested. The growth engines being revved — industry and infrastructure — are more carbon-intensive than services.

Technological breakthroughs are crucial for faster energy transition. For instance, a sharp reduction in solar module prices has accelerated adoption in India. But challenges remain. As the Survey points out, “India has low production capacity in the solar energy sector for key components like polysilicon, ingots, and wafers” that make it dependent on imports. So, strategic policy moves will be crucial.

A broader reform agenda on ease of doing business in India can boost animal spirits. But India has a long way to go in clearing regulatory hurdles pertaining to labour laws, land acquisition, tax regulations and dispute resolution. The government has demonstrated its coordination abilities in improving different aspects of logistics through the Prime Minister Gati Shakti plan. A similar approach can be taken towards implementing reforms across different fields.

Where does this leave fiscal consolidation? We advocate for a calibrated approach. This is crucial as gains from high nominal GDP growth are diminishing. Clearly, robust GDP growth — particularly nominal growth — supports fiscal consolidation. Nominal GDP grew at 14.2 per cent between fiscals 2022 and 2024, facilitating faster consolidation. This fiscal, it’s up 9.7 per cent, trailing budgetary assumption. Yet, India should be able to meet or surpass fiscal targets this financial year as spending, especially capital expenditure, will be lower than budgeted.

For the next year, however, given the myriad moving parts and the imperative to give the economy a leg-up, the Centre may stagger its fiscal deficit glide path.

Joshi is chief economist, and Tandon is senior economist at Crisil Limited