Challenges and Choices: India’s Policy Path in 2024

- Paras Jasrai

Policy Round-Up 2024

2024 has been a landmark year for India, marked by significant shifts in its economic and political landscapes. The year began with renewed optimism on the growth front and steering through electoral dynamics in the first half, however, the second half was marked with economic challenges and managing the new churn to coalition politics after a decade of majoritarian gear of policy. While the new year does bring in the freshness of new opportunities and challenges, it’s also vital to keep in mind and understand the old conceptions and situations. Thus, as 2024 is on the verge of being on the back burner, let's now look back at the year through the public policy lens.

Growth and Inflation

After a spring of 8% growth in FY24, this year has been a period of lull in economic growth. The GDP growth had slowed down to a near two-year low of 5.4% yoy in 2QFY25 (1HFY25: 6.0% yoy). The economic growth has been faltering for the past few quarters, something which has brewed concerns in the government and also is gradually finding some reflections in the common discourse.

A closer look at the GDP data indicates a few troubling trends and challenges that warrant immediate attention.

1. From the supply side, while agriculture and services have been resilient owing to a favorable monsoon and a steady push in new tech services, manufacturing on the other hand has been lagging.
2. From the demand side, the biggest slackening factor was investment demand. The general elections and some state elections had led to capital projects being pushed towards the second half of FY25. This had an impact on the overall investment demand at a time when government capex has helped sustain infrastructure development for the past few years. However, private investment continues to be prevalent in bits and pieces (renewable energy, chemicals, etc.). This year was again like 2023 where the hopes of broad-basing of private investment continue to linger on for some more time. While elections could have kept corporate India in the wait-and-watch mode, the cautious sentiment among businesses despite plenty of policy moves by the government such as corporate tax cuts, PLI schemes, etc is worrisome.
3. This leads us to the final point of consumption. Consumption represents the biggest component of India’s economic growth. This has revived somewhat to be above 6% in 1HFY25 as against the below-par growth of around 4% in the recent time. The recovery of rural demand has been behind the consumption revival but urban demand has been impacted by stagnant wage growth.

Apart from the aforementioned factors, domestic demand has been under the scanner as a result of government taxation policy as well. GST was an ambitious taxation reform that was undertaken by the government in 2017 to simplify the erstwhile indirect tax ecosystem. No doubt there has been a broader benefit to the economy through formalisation and other factors, but off late it is gradually turning away from being a Good and Simple Tax. Consider the recommendations of the recently concluded 55th GST Council. The Council has recommended that “ready-to eat-popcorn which is mixed with salt and spices are classifiable under HS 2106 90 99 and attracts 5% GST if supplied as other than pre-packaged and labelled and 12% GST if supplied as pre-packaged and labelled. However, when popcorn is mixed with sugar thereby changing its character to sugar confectionary (eg caramel popcorn), it would be classifiable under HS 1704 90 90 and attract 18% GST.” Simplicity and rationalisation of tax structure was at the heart and soul of the much-needed reform carved out of consensus, however, it seems that has been lost to the narrative of optimism. This is in contrast to the Direct Tax Code announcement of a straightforward and user-friendly tax system in Budget 2024.

At a time of slowing growth, the economy has been facing the issue of persistent inflationary pressures. Food inflation has been stubborn due to erratic monsoons and supply chain disruptions, and remained in high single digits throughout the year, thereby significantly impacting household budgets. This has complicated the central bank’s fight over inflation. To the Reserve Bank’s credit has been the secular decline in core inflation (inflation excluding food and energy components), a result of its nimble monetary policy actions in turbulent times. However, the larger public is affected disproportionately by elevated food prices which makes it challenging for the central bank to support growth with rate cuts. There has been a change in stance (to neutral in October 2024) and a liquidity booster shot (via a 50bp cut in Indian banks’ cash reserve ratio in December 2024) by the RBI, but it has maintained caution in jumping on the bandwagon (of cutting policy rates) in 2024.

Trade

Trade policy witnessed increased activity as India intensified efforts to diversify export markets and strengthen its global trade partnerships. Notable progress was made in concluding agreements with the European Free Trade Association and re-launch of negotiations with the EU, although there were some challenges (Switzerland removing India from the most favoured nations list, pause in trade negotiations with the UK). Foreign direct investment (FDI) inflows saw a modest rise, with contributions from sectors such as electronics, pharmaceuticals, and renewable energy, bolstered by the government’s Production Linked Incentive (PLI) schemes. However, concerns over global protectionism and geopolitical tensions remained hurdles. Amidst that, India’s exports were able to witness decent growth of around 7% during April-October 2024. A larger issue has been India’s exchange rate policy.

Trade gets impacted by how India’s exchange rate moves around vis-a-vis its partners after netting out the impact of inflation. While India’s exchange rate with the USD has depreciated, it has gotten stronger than other currencies such as the Euro, Yen, etc. As a result, the real effective exchange rate (exchange rate compared to a currency basket of 40 trading partners net of inflation) has increased to a record 108.14 in November 2024 which means that our exchange rate is not increasing relative to the high inflation that we have compared to the rest of the partners. This hurts the competitiveness of our exports. The narrow range within which the Indian rupee (compared to the USD) has been allowed to move around has come under the spotlight. Perhaps, this explains why the central bank finally allowed the rupee to hit the psychological mark of 85 in recent times. It’s time to let the rupee finally find its value.

Election Year Dynamics

The 2024 General Elections dominated the political discourse, setting the tone for governance priorities. The incumbent government’s return to power was widely expected to be thunderous (around 300-400 seats). However, this was not to be so. The voters helped restore some balance in power as the opposition gained some ground. The greatest show in Indian politics ended with democracy winning. The new political equations with the incumbent government forming the new administration through the strings of the coalition would help (hopefully) in bringing back the era of consensus building for policymaking. The nascent signs of which are already there in the making.

One of the current government’s biggest reform moves is the “One Nation, One Election (ONOE)”. There has been a swift movement in pushing through this controversial reform. A committee under the chairmanship of former president of India Ram Nath Kovind was constituted in September 2023, which submitted its mammoth report (18,626 pages!) in March 2024 (under seven months). The union cabinet approved the ONOE report in September 2024, after which it was quickly introduced in the winter session of Parliament in December 2024. The bill would require constitutional amendments and thus has been placed before a Joint Parliament Committee (JPC) with 31 members. There is another instance of WAQF bill introduced in August 2024 which has been placed for a JPC review.

Putting up some important bills for JPC review is significant as it helps draw out divergent views of various stakeholders and, through that, ironing out differences, attempts to build a consensus on a policy issue that can see the light of the day in terms of implementation. This was something which was direly missing in the 16th Lok Sabha. Only 1 out of 4 bills were sent to the JPC for a review in the 16th Lok Sabha, compared to nearly 3 out of 4 in the previous one).

Conclusion

As 2024 draws to a close, India’s policy landscape reflects a nation at the crossroads of ambition and complexity. Sustained economic growth of above 7% is critical not only from the employment perspective but even more important from the angle of social stability and an able polity. The year also marked the passing away of iconic industrialists such as Ratan Tata and economic stalwarts namely Dr. Manmohan Singh and Dr. Bibek Debroy, who had a rich legacy in taking India where it currently is. Now, it's up to us whether we want to pay close attention to the challenges that warrant attention and address the implementation bottlenecks to attain our erstwhile glory.

These are author’s personal views.