Recent data indicates a strong recovery in India’s economic activity. High frequency indicators such as vehicle sales, air traffic, steel consumption, and GST E-way bills suggest a sequential pickup in momentum during the latter half of fiscal year 2024-25. The Reserve Bank of India’s (RBI) February bulletin marks these trends, projecting sustained growth driven by robust rural and urban demand.
High Frequency Indicators
High frequency indicators provide real-time vital information about economic performance. They include metrics like vehicle sales and air traffic. The RBI’s analysis uses a Dynamic Factor Model to construct an Economic Activity Index (EAI). This index reveals a common trend among 27 indicators, showing a recovery in economic activity.
Impact of Global Economic Factors
The global economy is growing steadily but faces challenges. A strong US dollar, influenced by American economic resilience, is causing capital outflows from emerging markets. This trend increases risk premiums and external vulnerabilities for countries like India.
Domestic Demand and Fiscal Measures
Domestic demand is expected to rise due to several factors. The agriculture sector is performing well, boosting rural demand. Urban demand is also recovering, aided by declining inflation and income tax relief from the Union Budget 2025-26. This budget aims to fuel growth in agriculture, micro, small and medium enterprises (MSMEs), investment, and exports.
Monetary Policy Adjustments
The Monetary Policy Committee (MPC) recently cut the repo rate. This move is expected to enhance domestic demand. Lower interest rates can stimulate borrowing and spending, further supporting economic momentum.
Foreign Portfolio Investment Trends
Foreign portfolio investors (FPIs) have shown negative trends in January 2025. Net FPI outflows reached $6.7 billion, with equity outflows of $8.4 billion. This reflects rising risk-off sentiments among global investors amid heightened uncertainties.
Public Sector Bank Performance
Public sector banks (PSBs) have improved their transaction volumes. Recently, there was an increase in the share of PSBs in transactions compared to the previous year. The efficiency of banking systems has also enhanced, with fewer technical declines per 10,000 UPI transactions.
Foreign Direct Investment Growth
Despite global uncertainties, foreign direct investment (FDI) into India rose . Gross inward FDI increased by 20.6% year-on-year, reaching $62.5 billion from April to December 2024. This growth indicates continued investor confidence in the Indian economy.
Currency Trends
The Indian rupee (INR) depreciated by 1.5% month-on-month in January 2025, reflecting trends in major currencies. However, the INR exhibited relatively low volatility amid global market turbulence, indicating some resilience.
Questions for UPSC:
- Examine the impact of global economic factors on emerging market economies.
- Critically discuss the role of fiscal measures in stimulating economic growth in India.
- Analyse the trends in foreign portfolio investment and their implications for the Indian economy.
- Estimate the effects of monetary policy changes on domestic demand in India.
Answer Hints:
1. Examine the impact of global economic factors on emerging market economies.
- A strong US dollar can lead to capital outflows, increasing external vulnerabilities in emerging markets.
- Emerging market economies (EMEs) face higher risk premiums due to global economic resilience and trade policy shifts.
- Foreign portfolio investors (FPIs) tend to withdraw investments during periods of global uncertainty, impacting market stability.
- Currency depreciation in EMEs can result from global market pressures, affecting import costs and inflation.
- Global economic conditions, such as inflation rates and interest rates in developed countries, directly influence EMEs’ growth prospects.
2. Critically discuss the role of fiscal measures in stimulating economic growth in India.
- The Union Budget 2025-26 focuses on fiscal consolidation while promoting growth through capital expenditure (capex).
- Fiscal measures aim to boost sectors like agriculture, MSMEs, and exports, enhancing overall economic activity.
- Income tax relief increases disposable incomes, stimulating consumer spending and urban demand.
- Public investment in infrastructure can create jobs and improve productivity, further driving economic growth.
- Effective fiscal policies can balance short-term recovery needs with long-term sustainability goals.
3. Analyse the trends in foreign portfolio investment and their implications for the Indian economy.
- Net FPI outflows of $6.7 billion in January 2025 indicate rising risk-off sentiments among global investors.
- Equity outflows of $8.4 billion reflect concerns over global economic stability and domestic market conditions.
- Reduced FPI can lead to increased volatility in the stock market and affect liquidity in the economy.
- Negative FPI trends may hinder foreign investor confidence, impacting long-term capital inflow prospects.
- Monitoring FPI trends is crucial for understanding investor sentiment and its effects on currency and economic growth.
4. Estimate the effects of monetary policy changes on domestic demand in India.
- A repo rate cut by the Monetary Policy Committee (MPC) is designed to lower borrowing costs, encouraging spending.
- Lower interest rates can stimulate consumer and business loans, boosting investment and consumption.
- Monetary policy adjustments can impact inflation rates, influencing purchasing power and demand levels.
- Increased domestic demand can lead to higher production levels, creating jobs and further economic growth.
- Effective monetary policy can help stabilize the economy amidst external shocks and uncertainties.
