Tuesday, 14 Jan, 2025
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India faces the challenge of avoiding a sharp economic slump as worsening global conditions and declining domestic confidence erase the gains from a recent stock market rally, urging swift action from policymakers to stabilise the economy and sustain growth.
India’s economy is expected to grow 6.4 per cent in FY25, its weakest pace in four years, as sluggish manufacturing and softer investments put brakes on expansion, according to National Statistical Office (NSO) data released on January 7. More significantly, this figure falls below the Reserve Bank of India’s (RBI) 6.6 per cent estimate and reflects a sharp slowdown from the 8.2 per cent growth in FY24.
Economists are calling for fiscal stimulus in the February 1 Budget and expect mounting pressure on the central bank to slash rates, with the Monetary Policy Committee set to meet February 5-7.
Worth mentioning here is that the NSO forecast also lags behind more bullish projections from the World Bank and IMF, both pegging FY25 growth at 7 per cent, highlighting contrasting views on the trajectory of Asia’s third-largest economy.
The economy is projected to grow by 6.7 per cent in the second half of FY25, according to the NSO’s first advance estimate, driven by robust industrial production data from October and early signals from November and December. The full-year Gross Value Added (GVA) growth is projected at 6.4 per cent, reflecting steady economic activity.
High-frequency indicators for the December quarter closely align with the NSO’s projections, reinforcing optimism for moderate yet stable economic expansion. This alignment emphasises confidence in India’s ability to sustain steady growth as the economy progresses through the second half of FY25.
(Source MoSPI)
Notably, the 6.4 per cent growth projection represents the lowest estimate since the Covid-19 pandemic. This fall is attributed to a slowdown in both investment and consumption, particularly in urban areas. Factors such as reduced consumer spending, tighter credit conditions, and lower business investment have contributed to the economic deceleration, signalling potential challenges for the country’s recovery momentum in the near term.
At present, India is grappling with the challenge of averting a sharp economic slowdown. Worsening global conditions and declining domestic confidence have wiped out the gains from a recent stock market rally, prompting policymakers to act swiftly to stabilise the economy and sustain growth momentum.
The increasing economic concerns are leading to rising calls for Indian authorities to ease monetary policies and slow down fiscal tightening. With the uncertainty surrounding Donald Trump’s potential second presidency affecting the global trade outlook, policymakers are being urged to take proactive measures. These steps are necessary to shield India from external volatility while ensuring domestic stability, Reuters reported.
The key takeaway from the recent slowdown in India’s growth projections is that the expected surge in private consumption has been dampened by weak investment performance. Despite efforts like competitive corporate tax rates and the focus on Production-Linked Incentive (PLI) schemes, gross fixed capital formation (GFCF) growth for FY25 is projected at just 6.4 per cent, a sharp decline from 9 per cent in FY24. It raises questions about the effectiveness of government policies and underscores the broader challenges in sustaining growth momentum in the economy.
(Source: MoSPI)
Simply put, growth rates around 6.5 per cent are insufficient to meet the country’s pressing economic needs and the government’s lofty aspirations. With demographic pressures, infrastructure demands, and the need for job creation, such growth would likely fall short of addressing the broader socio-economic challenges. The government’s long-term vision requires a more robust and sustainable expansion trajectory to realise its ambitions for development and inclusive prosperity.
