ECONOMY SURVEY SUMMARY: 2024-2025

CHAPTER-1: STATE OF THE ECONOMY: GETTING BACK INTO THE FAST LANE
Notes Made by Nitin Arora (Founder of Arora IAS)

Economy Summary – 2024-2025 (Arora IAS Pattern)

Part 1: Summary of Economic Survey 2024-2025

In this section, we will provide a detailed summary of the Economic Survey 2024-2025, which covers the major trends,
forecasts, and policy changes related to the Indian economy. The Economic Survey serves as an important document
for understanding the current state of the economy and provides insights into the challenges and opportunities that lie
ahead.

Part 2: Crisp Points for Revision

Part 1:

INTRODUCTION

• Global economy influenced by growth dynamics, commodity prices, and monetary policies.
• Current complexities: Geopolitical tensions, supply chain disruptions, climate shocks.

• 1.Global Economic Scenario: Growth and inflation trends, policy stances of major economies, key risks and
uncertainties (e.g., geopolitical, supply chain, climate).
• 2.Domestic Macroeconomic Situation: Analysis of economic activity from both the demand-side (consumption,
investment, government spending) and the supply-side (agriculture, industry, services).
• 3.Emerging Trends: Examination of current developments in:
o Public finances (government revenue, expenditure, debt).
o Inflation (trends, drivers, policy responses).
o External sector (trade, balance of payments, capital flows).
o Financial markets (equity, debt, forex markets).
o Employment (unemployment rates, labor force participation).
• 4.Growth Prospects & Outlook: Assessment of future growth potential, considering both global challenges
(headwinds) and domestic strengths (growth drivers).

GLOBAL ECONOMIC SCENARIO

Steady global growth and varied regional dynamics
• Global Events (2024): Unprecedented elections, Russia-Ukraine & Israel-Hamas conflicts (impact on
energy/food security, prices, inflation), increased cyberattacks. Geopolitical tensions reshaped trade, increased
financial market volatility.
• Global Growth: Moderate growth; 3.3% (2023), projected 3.2% (2024), 3.3% (2025), ~3.2% average over next
5 years (modest by historical standards). Varied regional growth.
• Advanced Economies (AEs): Stable growth H1 2024 despite higher interest rates (moderating inflation,
sustained employment/consumption). Diverging outlooks:
• US: Strong growth projected 2.8% (2024), slight decline (2025) due to moderating consumption/exports.
• Euro Area: Growth expected to improve: 0.4% (2023) to 0.8% (2024) to 1.0% (2025) (improving services). Varied
growth within Euro Area: Strong services (Spain, France, Poland, UK) vs. weak manufacturing (Germany,
Austria). Germany's structural manufacturing weaknesses and political developments add to European
uncertainty.
• Growth Divergence (US vs. EU): Citi Economic Surprise indices show US data consistently outperformed
analyst expectations more than EU data (Jan 2023 - Nov 2024).
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 • Asia: Japan's growth hampered by supply disruptions. China's growth weakened post-Q1 due to sluggish
consumption/investment and real estate sector challenges.
Services sector growth steady; manufacturing faces challenges
• Global Composite PMI: Expansion zone for 14th consecutive month (Dec 2024). Services strong, manufacturing
contracting.
• Global Manufacturing PMI: Strong start in 2024 (expansion), weakened and contracted by July. Stabilized in
November (50.0) - no overall change. Consumer/intermediate goods output up, investment goods down.
Increased production due to stabilizing new orders and backlog clearance.
• Manufacturing Production Trends (Dec): Varied across regions. Increased in 13/30 nations. Eurozone steepest
contractions (France, Germany, Austria). Mixed North America (Canada up, US/Mexico down). India strongest
expansion. Subdued outlook, business sentiment at 3-month low.
• Global Services PMI: Rose to 4-month high of 53.8 in December. Expansion for 23rd consecutive month. Across
business, consumer, and financial services; financial services fastest.

Inflationary pressures ease, but risks of synchronised price pressures persist

• Downward Trend: Inflation rates declining, approaching central bank targets due to tighter monetary policy and
supply chain adaptation. Price pressures eased in 2023 (fuel prices), 2024 (goods inflation).
• Disinflation Slowdown: Services inflation persists, core goods inflation negligible. IMF attributes this to higher
nominal wage growth (early signs of abating).
• Shipping Disruptions: Recent disruptions increased goods prices, pressured supply chains (higher GSCPI).
Container freight rates surged in 2024 (stronger demand, Red Sea disruptions, Panama Canal delays), sustaining
inflationary pressures.
• Commodity Price Risk: Limited risk in 2025-2026. Prices expected to decline moderately after 2024 softening.
Risk of synchronized price increases remains (geopolitical conflicts, extreme weather). Recent shocks' impact
subsided, but escalating tensions still pose a risk.
Easing monetary policy stances amidst divergent expectations
• Policy Pivot: Major central banks lowering policy rates due to declining inflation. Pace of reduction will vary
across countries due to differing economic activity. Uncertainty about year-ahead and terminal policy rate levels.
• US Federal Funds Rate (FFR): Market expectations consistently below actual FFR in 2023/2024. Similar
uncertainty likely in 2025. FOMC dot-plots show long-run policy rate likely higher with increased variance in
members' expectations (increased uncertainty over terminal rate).
• Sovereign Bond Yields: AEs' yields declined (April-Sept 2024) due to inflation control, easing monetary policy,
and lower borrowing cost expectations. Increased (Oct-Dec 2024) due to renewed inflation/monetary policy
uncertainty. China's yields lower (lower growth/deflation), widening yield spread with US.

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Geopolitical uncertainties continue to pose risks to the global economic outlook
• Elevated Geopolitical Risks: Ongoing conflicts (Middle East, Russia-Ukraine) pose significant risks to global
economy (growth, inflation, markets, supply chains). Conflict intensification could reprice sovereign risk and
disrupt energy markets (oil market well-supplied but vulnerable).
• Suez Canal Disruption: Middle East tensions disrupted trade via Suez Canal (~15% of global maritime trade).
Shipping companies diverting ships, increasing delivery times (+10 days), and raising freight rates (impacting
global trade).
• Heightened Uncertainty: Geopolitical Economic Policy Uncertainty index remains high. World Trade Uncertainty
Index also risen (trade tensions/policy shifts). Trade policy uncertainty increased sharply (but below 2018-19
levels). G20 import restrictions affecting 12.7% of imports (3x 2015 levels). Persistent uncertainty/trade
restrictions could increase costs/prices, deter investment, hinder innovation, and reduce global growth.
DOMESTIC ECONOMY REMAINS STEADY AMIDST GLOBAL UNCERTAINTIES

Domestic Economic Situation (India - FY25 Estimates):

• Real GDP Growth: Estimated 6.4% (National Statistical Office).

• Aggregate Demand:
o Private Final Consumption Expenditure (PFCE): 7.3% growth (constant prices), driven by rural
demand rebound.
o PFCE share of GDP (current prices): Increased from 60.3% (FY24) to 61.8% (FY25), highest since
FY03.
o Gross Fixed Capital Formation (GFCF): 6.4% growth (constant prices).
• Supply Side:
o Real Gross Value Added (GVA): 6.4% growth.
o Agriculture: 3.8% growth (rebound).
o Industry: 6.2% growth (strong construction, electricity/gas/water supply).

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 o Services: 7.2% growth (financial, real estate, professional services, public administration, defense, etc.).

Resilient recovery

• Encouraging. Aggregate GVA surpassed pre-pandemic trend in Q1 FY25 and remains above trend in H1 FY25.
Sectoral Performance:

• Agriculture: Strong, consistently above trend.

• Industry: Above pre-pandemic trajectory.
• Services: Approaching trend levels.

Industrial Sub-sectors:

• Construction: Standout performer, ~15% above trend (infrastructure/housing).

• Utilities: Consistently above trend.
• Manufacturing: Recovering, slightly below trend.
• Mining: Below trend.

Services Sub-sectors:

• Financial, Real Estate, Professional Services: Above trend.

• Public Administration, Defence, Other Services: Above trend (since Q1 FY25).
• Trade, Hotels, Transport, Communication: Gradually catching up to trend (impacted by lockdowns/restrictions).

Growth in H1 FY25 driven by agriculture and services sector

FY25 GVA Growth (India):

• Overall GVA Growth: 6.2%

• Growth Momentum: Strong in Q1, subdued in Q2.
• Key Growth Drivers: Agriculture and Services.
• Tempering Factor: Moderation in industrial growth, particularly manufacturing (challenges from slowing global
demand and supply chain disruptions).

Improved agricultural prospects in FY25

Agriculture Growth (India - H1 FY25):

• Steady Growth: Q2 FY25 growth: 3.5% (improved over previous four quarters).
• Supporting Factors: Healthy Kharif production, above-normal monsoons, adequate reservoir levels.
• Kharif Food Grain Production (2024-25): Record 1647.05 LMT (first advance estimates), 5.7% higher than
2023-24, 8.2% higher than 5-year average. Increased rice, maize, coarse grains, and oilseeds output.
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 • Rabi Sowing (as of Jan 10, 2025): Wheat sowing 1.4% higher, gram sowing 0.8% higher (year-on-year).
Sufficient water for irrigation due to normal monsoon.
• Outlook: Improved prospects, potential for softening food inflation.

Manufacturing sector growth moderates but shows positive expectations

Industrial Sector Growth (India - H1 FY25):

• Overall Growth: 6%
• Quarterly Growth: Strong 8.3% in Q1, moderated in Q2.
• Q2 Moderation Factors:
1. Slower manufacturing exports (weak global demand, trade/industrial policies).
2. Above-average monsoon (mixed effects: positive for agriculture, disruptive for mining, construction,
and some manufacturing).
3. Festivity timing variation (Sept/Oct shift).
• Manufacturing Sub-sectors: Varied performance (global/seasonal factors).
o Oil companies: Suffered (inventory losses, lower refining margins).
o Steel companies: Faced price pressures, lower global prices.
o Cement sector: Weak demand (heavy rains, lower prices).
• Expected Recovery: Cement, iron, steel (post-monsoon, increased govt. spending). Mining and electricity to
normalize.

Robust growth in the services sector

• Overall Growth (H1 FY25): 7.1% (strong Q1 and Q2 performance).
• Sub-sectors: All performed well.
• High-Frequency Indicators (HFIs): Positive.
• PMI Services: Expansionary zone (new orders, output, sales, employment).
• Hospitality: Strong (similar hotel occupancy rates, higher daily rates/revenue per room due to increased travel).
• Air Cargo: Double-digit growth.
• Port Traffic: Stable.
• IT Companies: Improved performance.

Analysis of GDP by expenditure categories

Real GDP Growth: 6.7% (Q1), 5.4% (Q2), 6.0% (H1).
Demand Side:

• Private Final Consumption Expenditure (PFCE): 6.7% growth (YoY). Rural demand contributing (2/3 wheeler,
tractor sales, National Bank for Agriculture and Rural Development (NABARD’s) survey: 78.5% rural
households reported increased consumption). Rural demand expected to continue (Kharif returns, higher MSPs).
• Urban Demand: Mixed trends. Passenger vehicle sales growth slowed (4.2% YoY vs. 9.2% last year). FMCG
sales moderate. Air passenger traffic strong (7.7% YoY). PFCE growth (7.3% YoY) suggests recent pick-up.
• Gross Fixed Capital Formation (GFCF): Growth softened (10.1% in H1 FY24 to 6.4% in H1 FY25). Q1
slowdown due to elections. Private investment subdued (political timetable, global uncertainty, overcapacity). Q2
slowdown may be due to moderated residential investment (market normalization, healthy demand momentum).
• GFCF Outlook:
o Likely temporary. Govt. capex up 8.2% (July-Nov), expected to accelerate.
o RBI’s Order Books, Inventory, and Capacity Utilisation Survey (OBICUS): CU at 74.7% (above long-
term average).
o Private sector report: Order books up 23.6% (FY24), 10.3% (H1 FY25). RBI: Investment intentions
increased (₹2.45 lakh crore vs. ₹1.6 lakh crore last year).
• External Sector: Exports up 5.6%, imports up 0.7% (H1 FY25). Q2 imports contracted (-2.9%), driven by
commodity prices, boosting net exports and real GDP growth.
ECONOMY CHARACTERISED BY STABILITY AND INCLUSIVITY ON MULTIPLE FRONTS
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Improving public finances support macro stability
• Judicious Fiscal Management: Reduced general government dis-savings.
• Significance: Sustains overall economic savings.
• Context: Private corporate savings ~14% of GDP. Persistent government dis-savings could necessitate greater
reliance on foreign funding.
• Outcome: Prudent fiscal management in last 4 years prevented widening savings-investment gap, ensuring
comfortable financing of current account deficit (despite moderated household saving rate).
Fiscal discipline of the union government
• Fiscal Discipline: Improved progressively.
• Expenditure Quality: Capital expenditure as % of total expenditure continuously improving since FY21.
• April-November 2024 Key Points:

1. Capital expenditure: Subdued in Q1 (elections), rebounded after July (despite reduced non-debt receipts due
to increased tax devolution). Defence, railways, and road transport comprised ~75% of capex; significant YoY
growth in power and food/public distribution.
2. Gross Tax Revenue (GTR): Up 10.7% YoY, but Union's retained tax revenue barely increased due to increased
tax devolution to states.
3. Deficit Indicators: Comfortably placed, allowing room for developmental and capital expenditure.

Varying patterns in state finances

• GTR (Gross Tax Revenue) Comparison: Union's GTR and States' Own Tax Revenue (OTR) grew at
comparable rates.
• States' Overall Tax Revenue: Improved due to increased tax devolution from Union.
• State-Specific Taxes: Positive growth in stamps & registration, sales tax, state excise duties, and other
taxes/duties. Land revenue declined (collectively).
• OTR Dominance: In 15 states, OTR > 50% of total tax receipts (highest: Telangana 88%, followed by Karnataka
& Haryana 86%). Higher OTR/total revenue ratio correlated with lower revenue deficit/total revenue ratio.
• GST Reliance: For 23 states, GST main ORR source (highest: Manipur 78%, Nagaland 72%).
• Key ORR Contributors: Maharashtra (stamps & registration), Tamil Nadu (sales tax), West Bengal (state excise
duties). Odisha highest non-tax revenue share in ORR (49%).
Inflation – a combination of low and stable core inflation with volatile food prices
• Headline CPI Inflation: Softened from 5.4% (FY24) to 4.9% (April-Dec 2024).
• Decline Attributed to: 0.9 percentage point reduction in core inflation.
• Monthly Volatility: Food prices and select commodities caused CPI inflation to trend towards upper band (4 +/-
2%).
• Food Price Pressures: Supply chain disruptions, weather conditions.
• CFPI Inflation: Increased from 7.5% (FY24) to 8.4% (April-Dec FY25), driven by vegetables and pulses.
• TOP Commodities: Tomato, Onion, Potato (2.2% of CPI basket).

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External sector stability safeguarded by services trade and record remittances

India's External Sector:

• Mixed Trends: Due to volatile global conditions.

• Merchandise Exports: 1.6% YoY growth (April-Dec 2024). Non-petroleum exports up 7.1%. Non-petroleum,
non-gems & jewellery exports up 9.1%.
• Merchandise Imports: 5.2% growth, driven by non-oil, non-gold imports. Gold imports also up (higher global
prices, festive spending, safe-haven demand).
• Trade Deficit: Widened due to imports outpacing exports.
• Services Trade: Robust exports, contributing to balancing overall trade deficit. India 7th largest global services
exporter.
• Remittances: Healthy net inflow of private transfers. India top remittance recipient globally (World Bank), driven
by OECD job creation.
• Current Account Deficit (CAD): Contained at 1.2% of GDP in Q2 FY25 (services surplus + remittances).

India's Capital Flows & External Stability:

• CAD Financing: Comfortable financing by capital account.

• FDI:
o Gross inflows: Up 17.9% YoY (April-Nov 2024), highest except FY21.
o Net inflows: Declined due to higher repatriation (up 33.2% YoY). Repatriation increase via secondary
sales/IPOs suggests investor confidence in profitable exits.
• FPI: Volatile in H2 2024 (geopolitical/monetary policy). Net inflows slowed to USD 10.6 billion (April-Dec 2024)
from USD 31.7 billion last year. G-sec inclusion in JP Morgan EM Bond Index increased debt segment activity
(further details in Chapter 3).
• Forex Reserves: Increased from USD 616.7 billion (end Jan 2024) to USD 704.9 billion (Sept 2024), moderated
to USD 634.6 billion (Jan 3, 2025). Covers 90% of external debt, >10 months of imports.

Future Outlook:

• Global policy changes could impact exports (chemicals, machinery, textiles, electronics).
• Short-term: Export market diversification. Medium-term: Increasing market share.
• Long-term: Strategic partner in high-value sectors (biotech, semiconductors). Strategic technology partnerships
(space, semiconductors, quantum tech, advanced telecommunications).

Financial sector prospects amid a moderation of growth in credit disbursal

Banking & Financial Sector (India):

• Stability: Stable and well-capitalized, meeting financing needs.

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 • Credit Disbursal: Double-digit growth, but moderation in recent months (high base, regulatory tightening - RBI
raised risk weights on unsecured retail loans by 25 bps). Broad-based expansion, led by housing loans and
services sector credit. Industrial credit growth picking up but slower than other sectors.
• Asset Impairments: Declining (gross NPAs at 12-year low of 2.6%).
• Capital Buffers: Robust (CRAR at 16.7%, above norm).
• Profitability: Improved (PAT up 22.2% YoY, RoE and RoA improved).
• Macro Stress Tests: Banks' capital levels above regulatory minimum even in adverse scenarios.
• Credit-Deposit Growth Mismatch: Credit growth outpacing deposit growth (average cycle: 41 months).
Convergence usually achieved through lower credit growth. Current cycle elongated due to bank-non-bank
merger.
• Unsecured Credit Stress: 51.9% of new retail loan NPAs from unsecured loans (personal loans, credit cards).
Borrowers with unsecured loans often have other substantial loans (housing, vehicle), creating delinquency risks
for secured loans.
• Stock Market Monitoring: Need for caution (Indian and global markets). US market correction could impact
global markets.

Employment trends

India's Labour Market:

• Positive Trends: Supported by post-pandemic recovery and formalization.

• Unemployment Rate: Declined from 6% (2017-18) to 3.2% (2023-24).
• LFPR & WPR: Increased.
• Urban Unemployment (Q2 FY25): Improved slightly to 6.4% (from 6.6% in Q2 FY24). LFPR and WPR also
increased.
• Formal Sector Growth: Significant. EPFO subscriptions more than doubled (61 lakh in FY19 to 131 lakh in
FY24). 95.6 lakh net additions (April-Nov 2024), largely driven by youth (18-25 years: 47% of additions).
Government initiatives key to formalization.
• AI Impact: Opportunity for enhanced productivity, workforce quality, and job creation (if challenges addressed).
Education and skill development crucial for AI-augmented landscape. India can capitalize on early AI adoption to
prepare its workforce. Chapter 13 provides further details.

Outlook & Way Forward:

• Global Outlook: Steady growth, but regional variations. Near-term growth slightly below trend. Services drive
expansion (India resilient), manufacturing struggling (Europe's structural weaknesses). Trade outlook clouded.
• Inflation: Easing globally, but risks of synchronized pressures remain (geopolitical disruptions). Central banks
more accommodative, but rate cuts vary (growth/disinflation), creating potential divergence.
• Domestic Outlook:
o Consumption: Rebounding rural demand positive.
o Investment: Expected to pick up (higher public capex, improving business expectations). Capacity
utilization above average, strong order books, rising investment intentions.
o Potential Downside: Global excess capacity (e.g., steel) leading to aggressive trade policies.
• Food Inflation: Likely to soften in Q4 FY25 (seasonal easing, Kharif harvest). Good Rabi production to contain
prices in H1 FY26. Risks: Adverse weather, rising international prices.
• Core Inflation: Benign outlook (softer global energy/commodity prices). Risks: Global political/economic
uncertainties.
• FY26 Growth Projection: 6.3-6.8% (balancing domestic upsides/extraneous downsides). Robust fundamentals:
Strong external account, calibrated fiscal consolidation, stable private consumption.
• Policy Management: Strategic, prudent policies needed to navigate global headwinds, reinforce domestic
fundamentals. Budget 2024-25 laid out multi-sectoral agenda. Chapter 5 emphasizes deregulation and grassroots
reforms for competitiveness and higher trend growth.