The Business Bytes
New Delhi, September 3, 2024 (TBB Bureau): The Indian economy continues to grow at a healthy pace despite challenging global conditions, according to the World Bank’s latest India Development Update: India’s Trade Opportunities in a Changing Global Context. However, to reach its $1 trillion merchandise exports goal by 2030, India must diversify its export basket and leverage global value chains.
The India Development Update (IDU) notes that India remained the fastest-growing major economy, achieving a robust growth rate of 8.2 percent in FY23/24. This growth was driven by public infrastructure investments and an upswing in household investments in real estate. On the supply side, it was bolstered by a strong manufacturing sector, which grew by 9.9 percent, and resilient services activity, which helped offset underperformance in agriculture. Reflecting these trends, urban unemployment has gradually improved since the pandemic, particularly for female workers. Female urban unemployment fell to 8.5 percent in early FY24/25, although urban youth unemployment remains elevated at 17 percent. With a narrowing current account deficit and strong foreign portfolio investment inflows, foreign exchange reserves reached an all-time high of $670.1 billion in early August, equivalent to over 11 months of import cover (in FY23/24 terms).
Amid challenging external conditions, the World Bank expects India’s medium-term outlook to remain positive. Growth is forecast to reach 7 percent in FY24/25 and remain strong in FY25/26 and FY26/27. With robust revenue growth and further fiscal consolidation, the debt-to-GDP ratio is projected to decline from 83.9 percent in FY23/24 to 82 percent by FY26/27. The current account deficit is expected to remain at around 1-1.6 percent of GDP up to FY26/27.
The IDU also highlights the critical role of trade in boosting growth. The global trade landscape has witnessed increased protectionism in recent years. The reconfiguration of global value chains, triggered by the pandemic, has created new opportunities for India. The report emphasizes that India has boosted its competitiveness through the National Logistics Policy and digital initiatives that are reducing trade costs. However, it also warns that rising tariff and non-tariff barriers could limit the potential for trade-focused investments.
“India’s robust growth prospects, along with declining inflation, will help reduce extreme poverty,” said Auguste Tano Kouame, World Bank’s Country Director in India. “India can boost its growth further by harnessing its global trade potential. In addition to IT, business services, and pharma, where it excels, India can diversify its export basket with increased exports in textiles, apparel, footwear, electronics, and green technology products.”
The IDU recommends a three-pronged approach to achieve the $1 trillion merchandise export target by reducing trade costs, lowering trade barriers, and deepening trade integration.
“With rising production costs and declining productivity, India’s share in global apparel exports has declined from 4 percent in 2018 to 3 percent in 2022,” said Nora Dihel and Ran Li, Senior Economists and co-authors of the report. “To create more trade-related jobs, India should integrate more deeply into global value chains, which will also create opportunities for innovation and productivity growth.”
