NEW DELHI: Optimistic GDP growth forecasts for FY25 depend on strong government investment and effective inflation control for India to achieve growth above 7 per cent, according to Ernst & Young (EY) report.
Recent reports indicate a mixed outlook, with the Reserve Bank of India (RBI) maintaining a cautious stance on monetary policy amid rising inflation.
In September 2024, the Consumer Price Index (CPI) inflation was recorded at 5.5 per cent, taking the average inflation for the second quarter of FY24 to 4.2 per cent, slightly above the RBI’s expected target of 4.1 per cent.
Projections for the third quarter suggest that CPI inflation could rise to 4.8 percent, potentially delaying interest rate cuts by the RBI, especially as inflation continues to exceed the desired average target.
During its monetary policy review in October, the RBI decided to maintain the repo rate at 6.5 percent in light of the global trend towards rate cuts, including a 50 basis point cut by the US Federal Reserve in September.
Despite this, the RBI remains optimistic about India’s real GDP growth for FY25, forecasting 7.2 percent, driven by expected strong growth in private consumption and investment. However, there is significant downside risk, mainly due to a 19.5 percent contraction in public investment, which is crucial for maintaining economic momentum.
For the remainder of the fiscal year, the robust performance of personal tax revenues – growing by 25.5 percent – contrasts with negative corporate tax revenue growth of -6.0 percent. This highlights the challenge of meeting government budgeted growth targets, especially as capital expenditure also faces a sharp decline.
Recent high-frequency economic data indicates a moderation in growth momentum. The Manufacturing Purchasing Managers’ Index (PMI) fell to 56.5 in September, while the services PMI fell below 60 for the first time since January 2024, indicating a slowdown in production and new orders. In addition, the Industrial Production Index (IIP) contracted for the first time since October 2022, reflecting broader economic challenges.
The International Monetary Fund (IMF) has forecast a moderation in India’s GDP growth from 8.2 percent in FY24 to 7 percent in FY25 and further to 6.5 percent in FY26, attributing the slowdown to the depletion of pent-up demand from the Indian economy. pandemic.
Maintaining growth momentum requires accelerated public investment to avoid crowding out private sector initiatives.
