India’s Economic Slowdown (2024-2025): An In-Depth Analysis of the Growth Drivers and Policy Gaps

The Shifting Growth Drivers: From Agriculture to IT and Services

India’s economic landscape has transformed significantly since its post-independence days. Initially, agriculture was the backbone of the economy, with a majority of the population dependent on farming. However, the last few decades have seen a major pivot towards the services sector, particularly Information Technology (IT). This shift has led to substantial changes in employment trends, education, and economic growth.

Services Sector Dominance

• Services Sector now accounts for 54.7% of India’s Gross Value Added (GVA), a dominant share that highlights the importance of the sector in the national economy, according to the Economic Survey 2023-24.
• The shift from agricultural employment to IT and services has left large swathes of the rural population without alternative livelihood options, leading to rising migration to urban centers.
• The services sector, particularly IT, has created a skilled workforce capable of competing in global markets.

Skilling Mismatch and Policy Gaps

• Manufacturing’s stagnant share in GVA at 17.7% reveals limited progress in aligning education and skilling with the needs of the industrial sector.
• The mismatch in the skilling initiatives for manufacturing versus IT has exacerbated the gap in required labor for industrial sectors.

Despite the prominence of IT, the Indian education system has not sufficiently aligned itself with the demands of the manufacturing sector. The government’s “Make in India” initiative, launched in 2014, aimed to bolster manufacturing and make India a global manufacturing hub. However, manufacturing still contributes only 17.7% to India’s GVA, a relatively stagnant share considering the government’s push for industrialization. The focus on large industries has largely overshadowed the micro, small, and medium enterprises (MSMEs) that form the backbone of the industrial sector.

Manufacturing: The Unrealized Potential

While the manufacturing sector did experience a 9.9% growth in FY24, this was after a contraction of -2.2% in FY23, signaling that growth is uneven and far from the desired trajectory. India’s ambition to become a global manufacturing hub has faltered largely due to policy inconsistencies and a failure to implement industry-specific reforms.

MSMEs: The Backbone of Industrial Growth

• MSMEs contribute about 30% to GDP and around 45% to manufacturing output.
• Despite their significance, MSMEs face challenges like limited access to credit and inadequate infrastructure.

The Economic Survey notes that while credit growth to the MSME sector has been positive, the structural issues persist.

The IT Sector’s Struggles: Global Challenges and Domestic Gaps

The IT sector, which once served as the crown jewel of India’s economic success, is now facing several challenges. While the services sector continues to grow, concerns are mounting about the sector’s ability to sustain momentum in the face of global economic uncertainties and domestic policy issues.

Challenges to IT Sector Growth

• The IT sector’s contribution to India’s GDP has slowed, as highlighted by the Economic Survey 2023-24, with concerns about sustaining this growth.
• Global recession and increased competition from other countries have affected IT exports.
• Despite being a major driver of growth, the IT sector faces rising taxes on IT professionals and inflationary pressures at home.

Inflation Trends

• Retail inflation in India spiked to a 14-month high in October 2024 due to rising vegetable prices, hindering expectations for a rate cut by the Reserve Bank of India (RBI).

The Stock Market and Its Discontents: Easy Money, Less Productivity

The stock market has become a focal point for many Indians seeking wealth outside of traditional career paths. Since the pandemic, the stock market has seen an influx of retail investors, many lured by the promise of easy money. This has led to a distraction from productive work across sectors.

Stock Market Dynamics: A Double-Edged Sword

• Foreign investors withdrew over $10 billion from Indian equities in October 2024, signaling growing concerns about the sustainability of India’s bull run amidst a slowing economy.

Impact on Professional Focus

• Workplace productivity has suffered, with many professionals diverting their attention from work to stock market trading.

Nitin Lodha, Principal Consultant: “India’s economic trajectory is at a critical juncture. While the country’s IT and services sectors have made tremendous strides, it’s essential to focus on the forgotten pillars—agriculture and manufacturing. Without a holistic approach to these sectors, India risks losing its competitive edge in the global economy. It’s time for policymakers to align the workforce and industrial sectors to ensure sustainable growth for the future.”

Rising Land Costs and Their Impact on Agriculture

One of the most significant shifts in recent years has been in the agriculture sector, where rising land prices have led to demotivation among farmers. As land prices soar, many farmers have opted to sell their land for substantial profits rather than continue farming. This trend has been particularly harmful in rural areas where farming was once the primary source of livelihood.

Land as a Commodity

• Farmers who once relied on agriculture as their main source of income are now turning to real estate, where they can earn more by selling land.
• This shift has led to fewer young people entering farming, and land has become a commodity rather than a means of sustaining livelihoods.

The Absence of a Long-Term Vision: Fragmented Policies and Missed Opportunities

India’s economic trajectory has been hampered by a lack of cohesive long-term planning. While individual sectors have received attention—such as the push for IT growth and manufacturing expansion—there has been no unified national vision to guide their development. This fragmented approach has led to policy inconsistencies, with initiatives in one sector often clashing with those in another.

Policy Gaps: A Hindered Growth Trajectory

• The absence of clear coordination between policy frameworks has resulted in missed opportunities.
• India risks falling behind unless it can align its economic policies across sectors and create a unified vision for growth.

Vishal Shah, Head India MSME: “The MSME sector, which forms the backbone of India’s industrial growth, is facing structural challenges that have been ignored for too long. We must focus on providing MSMEs with the right infrastructure, access to credit, and support from the government to unlock their true potential. Only then can India truly become a manufacturing hub and create the jobs needed for its growing population.”