2024 yearender: A year marred by great economic uncertainties

Donald Trump will take charge as the US President for the second time on January 20, 2025. This has the potential of unleashing the biggest economic disruption global capitalism has seen . In a move that could have far-reaching consequences for the world economy, Trump has promised imposition of large-scale tariffs as a bargaining tool to buttress US’s economic dominance and well-being vis-à-vis other countries. Irrespective of what Trump might or might not do, his second presidency is likely to destabilize the rules-based international economic order significantly.

For the Indian economy, the consequences of a Trump presidency will mostly be via second order effects.

China+1, or the global trend of countries and companies diversifying production facilities away from China in the wake of tis geopolitical tensions with the US, has been an important driver of positive economic sentiment around India’s future economic prowess. Will a more mercantilist White House under Trump disrupt this process and major exporting countries and companies, reevaluate their strategies around Trump’s geoeconomics? It is difficult to answer this question as 2024 comes to an end. If Trump’s past stint is any indication, flip-flops might be more likely than a permanent policy direction.

The second source of instability for India could come from the global currency and capital markets. As a country with a large trade deficit, India’s ability to attract capital inflows is critical to its ability to maintain adequate foreign exchange reserves – they are an important macroeconomic buffer – and maintain the rupee within a broadly stable range. Both of these objectives have tested RBI in 2024 and will continue to consume its attention and policy space in 2025. The salience of these goals has also had a likely impact on RBI being reluctant to reduce interest rates despite domestic growth slowing down in the second half of 2024.

Should Trump enter into an open conflict with the US Federal Reserve or his tariffs trigger inflation in the US, things could become even more turbulent for India’s external economic outlook, which will complicate policy maneuvers.

Where does all this leave domestic economic policy landscape in India? The most plausible goal for economic policy in 2025 is likely to be an attempt to boost growth which has likely slipped back in the sub-7% zone with the post-pandemic demand boost now subsiding.

With just one big state (Bihar) going to polls in 2025, it is likely that the forthcoming budget will continue with its focus on fiscal consolidation rather than a big stimulus. This means that tailwinds to overall growth will have to come from sources other than the fiscal arm of the government.

Will private capex finally see a revival, something which has been eluding the economy for a long-time now? Economic history shows that private capex is always the proverbial tail which has to be wagged by the (demand) dog and not the other way round.

What will it take to boost domestic demand in the Indian economy? There is more than enough anecdotal evidence to show that India’s economic momentum is still characterized by the K-Shaped recovery where the rich are driving growth and the poor mostly seeking out a precarious subsistence. Even key officials in India’s economic policy establishment have now started talking about businesses usurping most of the fruits of recent economic growth rather than passing them along to workers in form of higher wages. The latter could have led to a sustainable rise on aggregate demand. Will the union government introduce changes in tax-slabs to undo this tilting of scales between capital and labour in the next budget? Or will it bring more changes to the GST slabs to try and increase indirect tax collections from the higher-income segments of the population, something which will also lead to higher revenues for state governments?

To be sure, even export demand could generate economic momentum for an economy. Will mercantilism in US and other advanced country markets generate headwinds for India’s export demand? Or will India let go of its geopolitical apprehensions vis-à-vis China and allow Chinese companies to come to India and facilitate its onward march in the new-age electronics sector which has a great export potential? The fact that the 2023-24 Economic Survey broached this idea makes this more than benign speculation.

More such questions can be raised about India’s economic course in 2025. The interesting part about them is that they are largely in the nature of responding to exogenous disruptions or a more hands-on engagement with structural factors in the economy. None of this means that there is any immediate crisis of macroeconomic stability or even growth which continues to be in the ballpark of India’s potential growth rate.

Whether economic policy takes a risk-averse or incremental attitude to these problems or decides to embrace large-scale disruption in the hope of such strategy leading to gains in the future is a political rather than economic call.