Time ripe for bold economic reforms
THE new year has arrived with many challenges on the economic horizon. The one that looms most darkly is the geopolitical turmoil prevailing in several parts of the world. Another one is the inauguration of Donald Trump as US President and the multifarious concerns over policy changes by the global economic superpower. These will have a broad international impact, but there will also be outcomes for India.
On the domestic front, all eyes will be on the new head of the Reserve Bank of India (RBI), Sanjay Malhotra, and his approach to inflation and growth. And as the Modi government prepares to present the second Budget of its third term, it will have to deepen reforms in order to slash the regulatory cholesterol that is clogging the route to higher economic growth.
The way forward must be viewed in the sombre context of the passing of several luminaries critically involved in the country’s economic development. The most significant loss has been that of the architect of the 1991 economic reforms, former Prime Minister Manmohan Singh. The late Osamu Suzuki, long-time chairman of Japan’s Suzuki Motor Company, took a bet on the over-regulated Indian economy in the mid-1980s. The gamble not only paid off for the company, but it also became the catalyst for the development of an automobile industry which now accounts for over 40 per cent of the manufacturing sector.
For the domestic industry, the biggest blow came in October when corporate titan Ratan Tata breathed his last. The unlikely, soft-spoken successor to the flamboyant JRD ended up galvanising and expanding the house of Tatas to make it the largest conglomerate in the country.
These giants in the economic and business arena contributed to the current status of India as the fastest-growing major economy in the world. Yet, as one looks ahead, there are worries that this pace may not be maintained in 2025. From 8.2 per cent growth in 2023-24, the current fiscal’s figure is likely to be lower. The second quarter — July to September — recorded a seven-month low of 4.5 per cent. Though there are expectations of a pickup in the third quarter along with reports of reviving consumption, the economy continues to face headwinds. The most worrying of these is the prospect of an escalation in geopolitical tensions. The Ukraine-Russia war proceeds relentlessly and the downing of an Azerbaijani airline indicates that these hostilities will continue to have ramifications for the rest of the world.
As for the Gaza conflict, it has not had widespread economic repercussions so far, but has the potential to create even more havoc. So far, the hostilities have extended to Lebanon and Iran, though in a limited manner. In case the latter becomes embroiled in a wider way, it would have a direct impact on energy prices and availability. Attacks on Iran’s oil and gas production or storage facilities are bound to have a bearing on international prices. Currently, oil markets are in the grip of bearish trends and prices of the benchmark Brent crude are hovering around $72-74 per barrel. But this situation could alter dramatically if the conflict widens to neighbouring West Asian countries that are oil producers. This could lead to a spike in oil prices, which would, in turn, have an immediate fallout here in terms of pushing up the oil import bill, while simultaneously raising inflationary pressures.
Another concern is the impact of tariff barriers sought to be imposed by the incoming Trump administration. Though the actual contours of his new trade policy are yet to be unveiled, he has declared that reciprocity would be a major element in formulating tariff proposals. While his greatest ire has been reserved for China and there have even been threats of levying up to 60 per cent import duties, he has also been sharply critical of India’s high tariff barriers. For this country, it means that the creeping increase in import duties over the past two years may have to be halted or even reversed as otherwise Indian goods may end up being uncompetitive in the lucrative American market. The worries on this score are justified as Trump has described India as “a very big abuser of tariffs” and stressed that such taxes will invite reciprocity.
On the plus side, the easing of protectionist tendencies is only for the good. On the negative side, it is not yet known whether the new Trump administration will enable Indian goods to have an edge in the US market vis-a-vis other countries like China. Much will depend on the final shape of trade policies formulated by the new administration.
As for raising the pace of growth, the role of the new RBI chief will be critical. His approach to the entire ‘inflation versus growth’ conundrum is eagerly awaited in the run-up to the next monetary policy committee meeting. A lot will depend on whether inflation continues to moderate in the coming months. It has already cooled down to 5.48 per cent in November along with a dip in food inflation, raising hopes of a rate cut that would give an impetus to investment and growth.
The next big policy push of the government will be outlined in the upcoming Budget. This might be a coalition government, but major constituents like the Telugu Desam Party have been in favour of reforms. It would thus be the right time to step up the pace of cutting down regulations and procedures at the Central and state levels. The complexity of rules related to labour and land use are major hurdles for foreign and domestic investors. A new wave of reforms in this direction is needed to give a push to investments in all segments of the economy.
The 2025-26 Budget should be used as a launch pad for such measures. These should be viewed in the backdrop of the growing recognition that without bold policies, it will not be possible to raise growth to the level of 8-9 per cent. One can only hope the new year ushers in such fresh initiatives.
