Yearender 2024: Indian Economy A Year Of Resilience Amid High Inflation, Global Challenges

In 2024, India, the fifth-largest economy, faced global challenges and a national election returning Modi’s government with a reduced majority, needing consensus-building, writes Krishnanand.

India, the world’s fifth-largest economy, has faced a turbulent year in 2024 marked by a combination of global challenges and domestic issues which saw a national election bring back Prime Minister Narendra Modi’s government for a third time, but with a reduced majority. The national election outcome reflects policy continuity, but with a need to build consensus among key alliance partners-- Bihar’s Chief Minister Nitish Kumar and Andhra Pradesh's Chief Minister N Chandramohan Naidu.

In addition to the changed political landscape, the Indian economy continued to face global challenges and uncertainty caused by the Russia-Ukraine war in Europe and Israel and the Hamas-Hizbollah-Iran conflict in the Middle East, one of the primary sources of the country’s energy imports.

Moreover, the country continued to face domestic challenges on the economic front such as a disruption in crop patterns caused by a prolonged monsoon that was triggered by the Al-Nino effect in the Indian Ocean.

This weird weather pattern led to a spike in food prices, particularly in the prices of fruits and vegetables that resulted in high retail inflation, which led the country’s central bank-- the Reserve Bank of India--to maintain elevated benchmark interest rates in the country, which has partly been blamed for a sharp plunge in the country’s GDP growth rate in the second quarter (July-September 2024 period) of the current fiscal.

However, despite all these challenges such as high inflation, global uncertainties, geopolitical tensions and supply chain disruptions India’s economy has shown remarkable resilience as it remains one of the fastest-growing major economies in the world and as per official government estimates expected to grow by 6.5 per cent in the current financial year.

India’s GDP Growth: A Bright Spot Amid Global Challenges

India’s economic growth in 2024 has been a standout feature in a world struggling with slowdowns. According to the data released by the Reserve Bank of India (RBI) and the Ministry of Finance, India’s Gross Domestic Product (GDP) growth rate is projected to reach approximately 6.2 per cent to 6.5 per cent in the FY 2024-25 (April 2024 to March 2025 period) respectively.

It will outpace many other major economies, including the US, China and the Eurozone. This performance has been largely driven by strong domestic demand, infrastructure development and resilient consumption patterns.

India’s economy was expected to do even better this year, but there was a sharp plunge in the second quarter (July-September 2024 period) due to a variety of reasons, which are still debated by economists and experts.

In the second quarter of this fiscal, the economic growth plunged to 5.4 per cent, the slowest in the nearly two-year period. In its monthly economic report released on Wednesday (December 26, 2024), the Finance Ministry blamed the Reserve Bank’s policy of maintaining high benchmark interest rates, known as the repo rate, for pulling down the demand that led to slower economic growth in the second quarter. However, the government stated that despite this slowdown in the second quarter, the annual economic growth was expected to be 6.5 per cent in the current financial year – much better than other major economies, including China.

Inflation Control and Monetary Policy Measures

High Inflation remained a key concern for India throughout this year, as rising food and energy prices--largely driven by a combination of domestic and global factors such as disruption in crop patterns caused by unusual monsoons and twin wars in Europe and the Middle East kept the prices elevated.

In order to battle the high inflation, the Reserve Bank maintained the repo rate at 6.5 per cent throughout the year. The retail inflation measured as the Consumer Price Index (CPI) was above 5 per cent for six months in the current year, including November 2024 and was above 6 per cent in October this year.

However, the high interest rate policy opted by the Reserve Bank of India came under criticism from senior government ministers such as Finance Minister Nirmala Sitharaman and Commerce and Industries Minister Piyush Goyal. While Nirmala Sitharaman called for more affordable interest rates for the borrowers that will drive consumption, Piyush Goyal called for keeping the food inflation (Consumer Food Price Index - CFPI) out of the retail inflation data (Consumer Price Index - CPI) used by the RBI for decision making on interest rates.

What was Driving India’s Economic Growth this year?

One feature of the country’s economy that stands out this year is the unprecedented level of capital infrastructure that has emerged as a major boost to the country’s economy.

The government allocated a record Rs 10.89 lakh crore for the capital expenditure this year which accounts for nearly 3.3 percent of the GDP.

The increased capital sector allocation reflects the government's emphasis on infrastructure spending in areas such as roads, railways, urban development, defence, and rural infrastructure. The increased Capex is aimed at stimulating economic activity and creating jobs which is considered essential for maintaining the momentum of economic growth in the year 2025.