What are the signals from the Indian economy? | Explained

The Indian economy, like many others globally, faced significant headwinds in recent years, first from a pre-existing slowdown and then exacerbated by the unprecedented COVID-19 pandemic. To counter these challenges and steer the economy towards a path of sustained growth and demand revival, the Indian government, in close coordination with the Reserve Bank of India (RBI), has adopted a multi-pronged strategy involving both fiscal and monetary policy interventions. Understanding these measures is crucial for comprehending India's economic trajectory and policy framework.

At the heart of the government's fiscal strategy is a robust focus on **Capital Expenditure (Capex)**. Recognizing the potent multiplier effect of government spending on infrastructure, the Union Budget for FY25 has allocated a significant Rs 11.11 lakh crore for Capex, marking a substantial 16.9% increase from the previous fiscal year. This sustained push for capital investment, seen over the last few budgets, aims to create durable assets like roads, railways, ports, and digital infrastructure. Such investments not only generate immediate employment and demand for raw materials but also enhance the economy's productive capacity in the long run, thereby boosting private investment and overall competitiveness. The historical context of economic development often highlights the role of public investment in kickstarting growth, especially during periods of private sector hesitancy.

Another cornerstone of the government's strategy to boost domestic manufacturing and integrate India into global supply chains is the **Production-Linked Incentive (PLI) scheme**. Launched across 14 key sectors since 2020, including automobiles, electronics, pharmaceuticals, textiles, and solar PV modules, these schemes offer incentives on incremental sales from products manufactured in India. The primary objective is to make Indian manufacturers globally competitive, attract substantial domestic and foreign investment, create large-scale employment opportunities, and reduce import dependence. This policy aligns with the 'Make in India' and 'Atmanirbhar Bharat' initiatives, aiming to transform India into a global manufacturing hub and reduce reliance on imports, particularly from geopolitical rivals. The success of PLI schemes is critical for India's industrial resurgence and export ambitions.

Complementing the government's fiscal efforts, the **Reserve Bank of India (RBI)** has played a vital role through its monetary policy tools. The RBI primarily uses the repo rate – the rate at which it lends to commercial banks – to manage liquidity and inflation. As of early 2024, the repo rate stood at 6.5%. While the RBI had initially cut rates during the pandemic to stimulate activity, it subsequently raised them to tame inflation, demonstrating its dual mandate of price stability and growth support. The Monetary Policy Committee (MPC), established under the RBI Act, 1934, is responsible for setting the policy rate to achieve the inflation target while keeping growth in mind. The effectiveness of monetary policy hinges on its transmission mechanism to the broader economy, influencing borrowing costs for businesses and consumers.

To mitigate the severe impact of the pandemic on small businesses, the government launched the **Emergency Credit Line Guarantee Scheme (ECLGS)**. This scheme provided 100% guarantee coverage to banks and NBFCs to enable them to extend credit to MSMEs and other eligible borrowers. By disbursing over Rs 5 lakh crore in credit, ECLGS played a crucial role in preventing widespread business failures, preserving jobs, and ensuring business continuity for millions of MSMEs, which are the backbone of the Indian economy. This targeted intervention was crucial for maintaining economic stability during a crisis.

Furthermore, to bolster rural demand and ensure welfare, **Direct Benefit Transfer (DBT) schemes** have been significantly expanded. Schemes like the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN), launched in 2019, directly transfer financial assistance to eligible farmer families. Under PM-KISAN, over Rs 2.8 lakh crore has been disbursed to farmers since its inception, providing crucial income support. DBT, facilitated by the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, ensures that subsidies and benefits reach the intended beneficiaries directly, minimizing leakages and improving the efficiency of public expenditure, thereby stimulating consumption in the rural economy. This approach aligns with the Directive Principles of State Policy, particularly Article 38, which mandates the state to secure a social order for the promotion of welfare of the people.

**Key stakeholders** involved in these measures include the Ministry of Finance, NITI Aayog, various line ministries (e.g., Ministry of Commerce & Industry for PLI, Ministry of MSME for ECLGS, Ministry of Agriculture for PM-KISAN), the Reserve Bank of India, public and private sector banks, businesses (MSMEs and large corporates), farmers, and the general consumer base. Their coordinated efforts are essential for the successful implementation and impact of these policies.

**Why this matters for India** is multifaceted. These measures are critical for achieving sustainable economic growth, creating much-needed employment opportunities for a young and growing workforce, reducing poverty, and enhancing India's global economic standing. By boosting domestic manufacturing, India aims to reduce its vulnerability to global supply chain shocks and become a more resilient economy. The fiscal health of the nation, as outlined under Article 112 (Annual Financial Statement) and Article 266 (Consolidated Fund of India) of the Constitution, is directly impacted by these budgetary allocations and their outcomes. The future implications involve monitoring the sustainability of public debt, managing inflationary pressures, ensuring equitable growth, and continuing structural reforms to attract more private investment and foster innovation. India's ability to maintain a delicate balance between fiscal prudence, monetary stability, and growth promotion will determine its economic trajectory in the coming decades, influencing its geopolitical significance and the welfare of its vast population.