Outlook for Indian economy appears bright, 7% GDP growth likely in FY’25: FinMin report

Investment is consolidating in the economy as high public capex crowds in private investment, which is beginning to set up additional plants and acquiring new machinery to address rising capacity utilisation, the report said.

4 min readNew DelhiUpdated: Feb 21, 2024 07:13 AM IST

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A healthy Rabi harvest, sustained manufacturing profitability, resilience in services along with an expected improvement in household consumption and private capex cycle are seen supporting economic activity in the coming financial year 2024-25 and the outlook for the Indian economy appears bright, the Finance Ministry said Tuesday. However, headwinds from geopolitical tensions such as supply chain disruptions and higher logistics costs, volatility in international financial markets, and geoeconomic fragmentation need watching, the ministry said in its monthly economic review for January.

Three successive years of high growth show the resilience of the Indian economy and the bedrock of high growth is strong private consumption. Investment is consolidating in the economy as high public capex crowds in private investment, which is beginning to set up additional plants and acquiring new machinery to address rising capacity utilisation, the report said.

During the current financial year, the Indian economy is estimated to grow at 7.3 per cent. This would be the third year in the row when the GDP would grow in excess of 7 per cent. The Reserve Bank of India has forecast India’s GDP growth for FY25 to be 7 per cent. Many global agencies have revised India’s growth projection upwards, the report said.

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This reflects the resilience of the Indian economy to sustain its growth path amidst ongoing geopolitical headwinds, it said, adding, the measures announced in the Interim Union Budget FY25 are expected to play a pivotal role in supporting India’s growth journey ahead.

Listing the tailwinds for the next financial year, the ministry said prospects of healthy Rabi harvesting, sustained manufacturing profitability and underlying service resilience are expected to support economic activity in FY25. On the demand side, household consumption is expected to improve, while prospects of fixed investment remain bright owing to an upturn in the private capex cycle, improved business sentiments, healthy balance sheets of banks and corporates, and the government’s continued thrust on capital expenditure, it said.

However, headwinds from geopolitical tensions, volatility in international financial markets, and geoeconomic fragmentation need watching, it said. Global slowdown, especially in India’s major trading partners, has led to a slowdown in demand for India’s merchandise exports. Also, there has been a decline in the overall value of imports due to a fall in international commodity prices, which spiked after the outbreak of the Russia-Ukraine conflict. This has led to a narrowing of India’s merchandise trade deficit in the first ten months of FY24, it said.

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“Downside risks to trade include a spike in new commodity prices from geopolitical shocks, including continued attacks in the Red Sea and supply disruptions or more persistent underlying inflation in the developed world, which could extend tight monetary conditions,” it said, adding that it could impact the expected recovery in global demand, thereby affecting the prospects for India’s exports.

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Lower input prices and overall inflation can influence output growth positively, which in turn can further improve the prospects for exports. Given persisting uncertainties for global output and trade growth, finding ways to enhance the competitiveness and attractiveness of India’s exports is both urgent and important, it said.

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On inflation, it said, pressure has moderated in January 2024 due to a fall in food as well as core inflation. The recent measures announced by the government to control food prices are likely to reduce inflation further, it said. The expectations of the fading away of El Nino and the forecast of a normal monsoon bodes well for a better-than-normal kharif sowing, it said.