• India's economy is projected to grow by 6.5% in FY25 and FY26, according to the 'EY Economy Watch December 2024' report.
• The report warns of potential subdued growth if the Government of India's investment expenditure remains low.
• Economic indicators show mixed growth momentum, with retail sales of motor vehicles showing double-digit growth.
• The government's fiscal strategy focuses on improving quality spending, reducing the fiscal deficit, and strengthening the social security net.

India's economy is set to experience a 6.5% real GDP growth in the current and next fiscal years (FY25 and FY26), according to a recent report. This projection aligns with expectations given the country's resilient economy and robust fundamentals.

The 'EY Economy Watch December 2024' report has combined the real GDP growth of the first two quarters of FY25, which stood at 6.7% and 5.4% respectively, with the Reserve Bank of India's revised growth estimates for the third and fourth quarters of FY25 at 6.8% and 7.2% respectively. This combination suggests that the annual FY25 real GDP growth could be estimated at 6.6%.

However, the report also warns that if the Government of India's investment expenditure turnaround remains subdued, the growth in the third quarter may be 6.5% or less. The real GDP growth has eased to 5.4% in the July-September quarter (Q2 FY25), a decrease from the 6.7% growth witnessed in the preceding quarter.

The data for October and November paints a mixed picture of the growth momentum of the Indian economy. The manufacturing Purchasing Managers' Index (PMI) saw a softer expansion of 56.5 in November compared to 57.5 in October. However, the services PMI remained nearly stable at 58.4 in November 2024, close to its level of 58.5 in October 2024. This stability is attributed to strong international demand and improving business confidence.

Economic Indicators and Market Performance

The Federation of Automobile Dealers Association released data showing that retail sales of motor vehicles continued to show a double-digit growth of 11.2% in November. Particularly, retail sales of two-wheelers and tractors showed robust growth rates of 15.8% and 29.9% respectively in November 2024.

The report also highlighted that October 2024 saw an increase in the Index of Industrial Production (IIP) growth to 3.5%, up from September's 3.1%. This growth was driven by stronger manufacturing and electricity production. Inflation, as measured by the Consumer Price Index (CPI), eased to 5.5% in November from 6.2% in October as vegetable prices eased. However, core CPI inflation remained steady at 3.7% for the second successive month. Wholesale Price Index (WPI) inflation also moderated to 1.9% in November from 2.4% in October.

DK Srivastava, Chief Policy Advisor at EY India, stated that in the medium-term, India's real GDP growth prospects can be maintained at 6.5% per year. This is contingent on the government accelerating its capital expenditure growth in the remaining part of the current fiscal year and developing a medium-term investment pipeline. This pipeline should involve participation from the Government of India and state governments, their respective public sector entities, and the private corporate sector.

Government's Fiscal Strategy and Economic Outlook

In a related development, the government has expressed its commitment to improving quality spending, strengthening the social security net, and reducing the fiscal deficit to 4.5% of the GDP in the financial year 2025-2026. Finance Minister Nirmala Sitharaman is expected to continue the government's position of increasing expenditure on big-ticket infrastructure projects and social welfare schemes for the poor while keeping the fiscal deficit in check when she presents the Union Budget for 2025-26 in Parliament on February 1.

The government is committed to pursuing the glide path of fiscal consolidation, which aims to lower the fiscal deficit to 4.5% of GDP by the financial year 2025-26. The focus will be on improving the quality of public spending while strengthening the social security net for the poor and needy. This approach is expected to further strengthen the nation's macro-economic fundamentals and ensure overall financial stability.

The EY report also suggests that a recalibrated approach is vital for sustainable debt management, eliminating government dissavings, and driving investment-led growth. This approach would pave the way for India's transformation into a developed economy. The report also suggests that the total debt of the central and state governments combined should not exceed 60% of the country's nominal GDP, with each taking an equal share of 30%. A major reform is required in the Fiscal Responsibility and Budget Management (FRBM) Act to ensure fiscal responsibility while supporting India's ambitious growth goals.