The Measured March of India’s Economy

Part 4:

Amid global uncertainty, India’s economy ahead of Budget 2025 keeps moving forward, albeit with a few stumbles along the way.

A country’s economic pulse is rarely a steady beat. It quickens, falters, and adapts to internal and external shocks. India, a nation of a billion aspirations, has seen its economy navigate a tightrope between resilience and volatility. While much attention has been paid to agriculture, consumer demand, employment levels and inflation, the story remains incomplete without an examination of manufacturing and the services sector.

Ahead of Budget 2025, India’s economic trajectory is poised at a critical juncture. The Index of Industrial Production (IIP), a vital gauge of economic activity, measures industrial output trends against a base year. From April to October 2024, the IIP grew by four percent year-on-year, a noticeable deceleration from the seven percent expansion in the previous year. The industrial sector posted an 8.3 percent growth in the first quarter, only to slide to four percent in the second, dragging the overall growth rate to six percent for the first half of fiscal year 2025. The global economic landscape, rife with geopolitical tensions and supply chain disruptions, has weighed heavily on India’s industrial production, especially in the latter months.

A closer look at the data shows a mixed impact across industries. Oil companies face inventory losses and shrinking margins, while steel manufacturers struggle with falling prices. Heavy rains in Q2 dampened construction, lowering demand for raw materials. However, with the monsoon’s end, the government's capital expenditure push and rising urban demand could revitalize sectors like cement, iron, and steel. The manufacturing PMI for April-November 2025 stood at 57.5, indicating expansion, and the RBI's Industrial Outlook Survey shows improved demand conditions, with expectations of continued growth in the final quarter.

Meanwhile, the services sector, India’s economic workhorse, expanded by 7.1 percent in the first half of fiscal year 2025, up from six percent in the same period the previous year. The services PMI, though slightly lower year-on-year at 59.7, remains in expansionary territory. Hospitality has held steady, with hotel occupancy rates mirroring last year’s levels, while daily rates and revenue per room have climbed, buoyed by increased corporate and leisure travel. Digital payments, too, have surged, with transactions now accounting for nine percent of GDP as of December 2024, up from below eight percent in March. Average daily Unified Payments Interface (UPI) transactions reached 5.4 billion, a sharp rise from 3.9 billion in December 2023.

Foreign investment patterns reflect a mixed sentiment. Gross inward foreign direct investment (FDI) between April and November 2024 totalled $55.6 billion, a healthy increase from $47.2 billion a year earlier. Mauritius, Singapore, the United States, the Netherlands, Japan, the United Kingdom, and the United Arab Emirates collectively accounted for over 75 percent of these inflows. Foreign portfolio investments (FPI), however, have been more volatile. While net FPI inflows reached $20.1 billion in the first half of the fiscal year, the third quarter saw an outflow of $11.6 billion, and by mid-January 2025, another $3.4 billion had exited Indian markets. The capital markets, rattled by global uncertainty, high domestic valuations, and rising U.S. Treasury yields, have responded with characteristic jitters.

Despite these fluctuations, India’s foreign exchange reserves remain formidable. As of January 3, 2025, reserves stood at $634.6 billion, equivalent to 11 months of imports and nearly 90 percent of the nation’s total external debt as of September 2024. India now ranks as the world’s fourth-largest holder of foreign exchange reserves, behind only China, Japan, and Switzerland. However, the Reserve Bank of India’s active intervention in forex markets to defend the rupee led to a depletion of $20 billion in reserves. Since these interventions ceased, the rupee has depreciated, offering a silver lining for exporters but complicating import costs.

The second half of fiscal year 2025 holds promise but also uncertainties. While factors like a good monsoon, a recovering agricultural sector, strong demand, and rising government spending are expected to sustain growth, external challenges like geopolitical tensions, an unstable rupee, fluctuating commodity prices and changing U.S. policy could disrupt momentum. Crucially, a slowdown in growth doesn’t signify economic contraction. Despite alarmist headlines, the data reveals resilience, not crisis.

In closing, it is worth recalling the immortal words of Robert Frost: “The woods are lovely, dark, and deep, but I have promises to keep, and miles to go before I sleep.” For the Indian economy, those miles stretch ahead, filled with both challenges and opportunities.

(The author is a Chartered Accountant and works at Automotive Division of Mahindra and Mahindra Limited. Views personal.)