Economic Survey Chapter 5: India's Medium-Term Economic Outlook

India's medium-term economic outlook depends on domestic investment, productivity and demand as well as global trade fragmentation, technology, energy transition and geopolitical risk. This consolidated chapter brings together growth projections and the structural changes shaping policy choices.

Global Economic Shifts:

• Trade Restrictions: Between 2020 and 2024, over 24,000 new trade and investment restrictions have been introduced globally, marking a fundamental shift in global economic engagement.
• Impact: These shifts are reflected in slower global trade growth and signs of secular stagnation in the global economy, impacting long-term economic prospects.

Re-evaluating Long-held Economic Practices:

• China’s Role: China has become a dominant force in global manufacturing and energy transition, leveraging its competitiveness and economic policies.
• Uncertainty: The global economy is at a crossroads where traditional economic principles are being reconsidered and losing relevance. Countries are now operating in a new environment, where uncertainty about the future rules prevails.

China’s Dominance in Manufacturing and Energy Transition:

• Manufacturing: In 2000, China accounted for just 6% of global industrial production. By 2030, it is expected to account for 45%, outpacing the US and its allies in manufacturing.
• Strategic Advantage: China controls key resources essential for global supply chains, giving it a significant strategic advantage.
• Impact: China’s rise has disrupted economies like Germany and Japan, especially in the auto market, and dominates the global distribution of critical minerals and other resources, creating potential future dependencies.

RESET OF GLOBAL MANUFACTURING PRACTICES

• Outsourcing: The outsourcing of manufacturing to China during the globalization era is set to undergo a reset.
• Turning Point: China’s resurgence marks a significant turning point in global economic practices, as countries re-evaluate their manufacturing strategies and supply chain dependencies.

CLIMATE TRANSITION, CHINA & GLOBAL GEOPOLITICS

Climate as a Global Public Good:

• Impact: Climate change is a global public good that affects everyone, with consequences that are still being understood. For instance, a 1°C warming can reduce global GDP by 12%.
• Correlation: There is a strong correlation between global temperature and extreme climatic events, highlighting the urgent need for climate action.

Global Greenhouse Gas Emissions:

• Major Emitters: China, the US, the EU, and other G7 economies produce more than 50% of global greenhouse gas emissions.
• Net-Zero Targets: These economies have set 2050 targets to reach net-zero emissions, but trade conflicts between these economies could significantly disrupt the green energy transition, imposing high costs on the global economy.

INDIA’S CLIMATE ACTION

• Panchamrit: India has committed to climate action through the Panchamrit (five nectar elements), which will impact how India meets its energy requirements and shift its energy mix.
• Renewable Energy: By 2030, the share of renewable energy (especially solar and wind) in India's installed capacity is expected to increase, while coal and lignite will decrease.

CHINA’S ROLE IN ENERGY TRANSITION

• Solar PV: China dominates the solar photovoltaic (PV) industry, accounting for 80% of the manufacturing stages, more than double its share of global PV demand.
• Wind Energy: 60% of the world’s wind installed capacity comes from China.
• Battery Manufacturing: China holds 80% of global battery manufacturing capacity, a critical component for the energy transition.
• Investment: In 2022, China allocated USD 546 billion for investments in solar, wind energy, electric vehicles, and battery technologies, surpassing the investments made by the US and EU.

INDIA’S STRATEGY FOR E MOBILITY

• Investment: India is investing in metro rail networks to reduce dependence on overseas supply chains for e-mobility.
• Public Transport: Currently, only 37% of India's urban population has easy access to public transportation. To meet Net Zero goals, India must focus on developing integrated transport systems that connect buses, metro rails, and other modes of transit.
• Benefits: Investing in efficient and accessible public transport will promote clean mobility, reduce traffic congestion, and support a more resilient and equitable energy transition.

INDIA’S RENEWABLE ENERGY MANUFACTURING EFFORTS

• PLI Scheme: India is making progress in promoting renewable energy and domestic manufacturing of renewable energy equipment through the Production-Linked Incentive (PLI) scheme.
• Dependence: Currently, India sources 75% of lithium-ion batteries from China and has negligible production capacity for critical components like polysilicon, ingots, and wafers.
• Challenge: If trade disruptions occur between blocs regarding critical minerals, investment in renewable energy and electric vehicles could be 30% lower by 2030 compared to a non-fragmented world, hindering the transition and affecting growth opportunities.

IMPLICATIONS FOR INDIA’S GROWTH PROSPECTS

Vision for Viksit Bharat@2047:

• Goal: India aims to become a developed nation by 2047, the centenary of its independence.
• Growth Rate: To achieve this, India needs to maintain a sustained growth rate of 8% per year for at least a decade.
• Investment Rate: The investment rate needs to rise from 31% of GDP to 35% to support this growth.
• Key Areas: Focus areas include manufacturing, emerging technologies like AI, robotics, and biotechnology, as well as creating 78.5 lakh new non-farm jobs annually until 2030.
• Education and Infrastructure: Achieving 100% literacy, improving education quality, and developing future-ready infrastructure at scale will also be essential.

POLICY ACTIONS TO SUPPORT GROWTH

• Digitization: India has taken steps toward digitization, decriminalization, and divestment of functions to streamline processes and reduce regulatory burdens.
• PAN 2.0: The PAN 2.0 project aims to streamline paperless processes and unify digital systems.
• Jan Vishwas Act 2023: This act decriminalized provisions across central acts to reduce unnecessary regulations.
• Regulatory Modernization: Further regulatory modernization is needed to maintain flexibility as the economy grows, addressing new constraints and challenges.

FOCUS ON MEDIUM TERM STRUCTURAL REFORMS

• Manufacturing: Upgrading capacity and technological know-how of manufacturers is crucial.
• Human Resources: Improving human resource availability and addressing resource bottlenecks to accelerate capital formation.
• Agriculture: Unlocking the potential of the agriculture sector by addressing challenges and promoting growth.
• Green Capital: Leveraging global green capital for funding the green transition.
• Education and Employment: Bridging the education-employment gap and enhancing state capabilities to support growth.

Growth Aspirations:

• Vision: India aims to become a "Viksit Bharat" (Developed India) by the centenary of its independence in 2047.
• Growth Rate: To achieve this vision, India needs to maintain an average growth rate of around 8% at constant prices for the next 10-20 years.
• Factors: This growth will depend on both domestic factors, such as policy reforms and infrastructure development, as well as the global environment, including political stability and economic trends.

IMF Projections:

• Economy Size: The International Monetary Fund (IMF) expects India to become a USD 5 trillion economy by the fiscal year 2028 (FY28) and further grow to USD 6.307 trillion by FY30.
• Annual Growth: The IMF projects that India's nominal GDP will grow at an annual rate of 10.2% in USD terms from FY25 to FY30.
• Comparison: For context, over the past 30 years (from FY94 to FY24), India's GDP in dollar terms grew at an annual rate of 8.9%.

Nominal GDP Growth:

• Past Growth: India’s nominal GDP has grown at an impressive rate of 12.4% annually over the past three decades.
• Future Growth: For the next five years, the IMF projects that India's nominal GDP will grow at a rate of 10.7% annually.
• Rupee Depreciation: The rupee is expected to depreciate mildly by 0.5% per year from FY25 to FY30, which is much lower than the 3.3% annual depreciation seen in the last 30 years.
• This reflects India's growth potential and its role as an attractive investment destination.

Current Account Deficit:

• Projection: The IMF projects that India’s current account deficit will gradually rise to 2.2% of GDP by FY30.
• Reason: This gradual increase is seen as a natural part of India’s economic evolution and growth, as the country invests more in infrastructure and other development projects.

Growth Projections for FY26:

• Ministry of Statistics: The Ministry of Statistics and Programme Implementation projects a 6.4% growth in constant prices for FY25.
• IMF Projection: The IMF expects growth for FY26 to be between 6.3% and 6.8%, with an average projection of around 6.5% growth from FY26 to FY30.

GLOBAL ECONOMIC & POLITICAL CONTEXT

• Impact: The global environment, particularly geo-economic fragmentation, will significantly affect global growth. This fragmentation refers to the breakdown of global economic integration due to political and strategic considerations.
• China’s Role: China's manufacturing dominance and strategic influence will play a crucial role in shaping global economic trends. India must navigate these challenges to achieve its growth targets.

GLOBAL ECONOMIC FRAGMENTATION

Keynes' Vision of Globalization:

• Ideal World: John Maynard Keynes envisioned a world where people could easily access global products and invest anywhere, enjoying prosperity and ease.
• Impact: This vision reflects the state of hyper-globalization over the past few decades, where global integration has shaped economic life, leading to significant flows of capital, goods, services, and people, enhanced by technology and ideas.

Geo-Economic Fragmentation (GEF):

• Definition: Geo-Economic Fragmentation (GEF) refers to the policy-driven reversal of global economic integration, often guided by strategic considerations.
• Impact: GEF affects trade, capital, and migration flows, leading to a more fragmented global economy.
• Consequences: While globalization brought many benefits, hyper-globalization led to complacency, leaving some people behind due to changing industries and rising global competition.

GLOBALISATION IN THE PAST FEW DECADES

• Trade Growth: In 1980, global trade was 39% of world GDP, rising to 60% by 2012, showing deeper market integration.
• FDI Growth: Foreign Direct Investment (FDI) grew from USD 54 billion in 1980 to over USD 1.5 trillion in 2019, highlighting the rise of multinational corporations.
• Economic Growth & Poverty Reduction: The global economy grew from USD 11 trillion in 1980 to USD 100 trillion in 2022 (nominal). Extreme poverty rates fell from 42% of the global population in 1981 to 8.4% in 2019, largely due to rapid growth in countries like China and India.

GROWTH IMPLICATIONS OF GLOBAL ECONOMIC FRAGMENTATION

Impact on Trade:

• Trade-Restrictive Measures: Trade is the primary channel through which fragmentation reshapes the global economy. Increasingly, trade-restrictive measures are stifling the ability of trade to generate productivity gains.
• Value of Trade: Between October 2023 and October 2024, the value of trade covered by 169 new trade-restrictive measures was USD 887.7 billion, up from USD 337.1 billion in the previous year.
• WTO Report: The World Trade Organization (WTO) has reported a sharp rise in the coverage of trade restrictions, indicating a more protectionist global trade environment.

Cost of Trade Fragmentation:

• Global Output: The IMF estimates that the cost of trade fragmentation could reduce global output by 0.2% to 7% of GDP, depending on the level of fragmentation.
• Technological Decoupling: If technological decoupling is added to the mix, output losses could rise to 8-12% of GDP in certain countries, highlighting the significant economic impact of fragmentation.

Foreign Direct Investment (FDI) and Friend-Shoring:

• FDI Flows: FDI flows are increasingly concentrated in geopolitically aligned countries, particularly in strategic sectors.
• Emerging Markets: Emerging markets and developing economies face greater restrictions and output losses due to friend-shoring and re-shoring, as FDI moves away from these economies towards more aligned countries.

Why This Topic Matters for UPSC

• Prelims: Revise definitions, institutions, locations, reports and factual features connected with Economic Survey Chapter 5: India's Medium-Term Economic Outlook.
• Mains: Link the topic with Economy, Economic Survey, Globalisation, Climate Policy and organise the answer under background, significance, challenges and way forward.
• Interview: Explain the issue in balanced language and distinguish verified facts from opinion.

Key Takeaway

India's medium-term economic outlook depends on domestic investment, productivity and demand as well as global trade fragmentation, technology, energy transition and geopolitical risk. This consolidated chapter brings together growth projections and the structural changes shaping policy choices.