India’s economic momentum continued to flourish in FY25, showcasing resilience and broad-based growth across sectors. After a cumulative real GDP growth of around 27% since FY21, the nation has not only recovered from the pandemic’s economic disruption but also achieved significant structural improvements in many productive areas by the close of FY24. The foundation laid during these years is now enabling India to maintain a strong economic trajectory, with the GDP at constant prices growing by 6.7% in Q1 FY25.

All major non-agricultural sectors reported growth rates exceeding 5%, signaling a broad-based economic expansion. This growth pattern underlines India’s increasing capacity in sectors like manufacturing, services, and infrastructure. Alongside these sectors, advancing monsoon conditions have spurred kharif sowing, which has improved the outlook for agricultural production, adding a further boost to the economy.

Reflecting the vibrant economic activity, the major components of aggregate demand—including private consumption, fixed investment, and exports—have all gained momentum. Despite government expenditure increasing slowly, owing to the general elections during April-June, private investment has surged, with overall investment growing by 7.5% in Q1 FY25. This marks a clear sign of the strengthening private investment cycle, which is essential for long-term economic stability.

High-frequency indicators on the supply side continue to project robust economic growth. Key metrics such as steady GST collections, an upward trend in the Purchasing Managers’ Indices (PMI), and increased air and port cargo traffic reflect sustained productivity and economic activity. These indicators suggest that the momentum built in the first quarter will persist, keeping India’s growth prospects strong in the near term.

The global trade environment remains dynamic, influenced by factors such as geopolitical conflicts, trade disputes, climate change, and the rapid advancement of Artificial Intelligence. Protectionist trade policies and shifting global supply chains are reshaping international trade, with the World Trade Organization (WTO) predicting gradual global trade growth for 2024 and 2025.

Despite these global challenges, India’s export of goods has shown minimal growth in the first five months of the year compared to the same period in 2023, largely due to weak global demand and persistent domestic challenges in scaling up production and competitiveness. Meanwhile, strong domestic demand has led to a rise in merchandise imports. However, urban consumption is showing signs of weakening, as evidenced by a decline in automobile sales in the same period.

Capital flows into India have remained steady, and Foreign Direct Investment (FDI) inflows have seen an uptick. Foreign portfolio investors were net buyers from April to August 2024, contributing to a rise in foreign exchange reserves, which have reached historically high levels. This inflow of capital is a critical factor in supporting India’s economic growth trajectory, as it bolsters the country’s ability to fund investments and maintain currency stability.

The labour market is showing signs of recovery, with net payroll additions under the Employees’ Provident Fund Organisation (EPFO) rising in Q1 FY25. This signals a rebound in formal job creation, which is vital for sustained economic growth and improving living standards. Headline retail inflation remained low at 3.7% in August 2024, with food inflation softening and core inflation remaining steady.

Looking ahead, replenished reservoir levels and increased kharif sowing acreage are positive signs for the food price outlook. However, the uneven spatial distribution of the monsoon could pose risks to agricultural output, which will require close monitoring. As the rural economy strengthens and public expenditure picks up, India’s growth is expected to remain robust in the coming quarters. With strong private consumption, rising investment, and steady global capital inflows, India is well-positioned to maintain its growth momentum through FY25. However, external factors such as global trade dynamics and domestic challenges in production and productivity will require continuous focus to ensure sustainable long-term growth.

This broad-based economic expansion, paired with a favorable inflation outlook and improving labour market conditions, paints a promising picture for India’s economic prospects in the coming months.

The Asian Development Bank (ADB) has maintained India’s growth forecast at 7% for the current fiscal year, with expectations of an accelerated growth rate of 7.2% in FY26, according to the report released on September 25. This projection aligns with the Reserve Bank of India’s (RBI) forecast, signaling strong economic resilience despite global geopolitical challenges.

Key highlights of India’s economic growth projections:

Steady economic growth: ADB’s forecast of 7% growth for FY24 underscores India’s economic stability, driven by favorable domestic factors and a robust recovery from previous global challenges.

Accelerated growth in FY26: ADB projects a growth rate of 7.2% for FY26, further highlighting the country’s economic potential. This positive outlook is fueled by continued investments and strong domestic demand, alongside government efforts to boost infrastructure and capital expenditure.

Impact of monsoon on agriculture: ADB emphasized the positive effect of an above-average monsoon in most regions of the country, which is expected to drive strong agricultural growth and contribute to the rural economy’s expansion in FY25.

Inflation and Monetary policy outlook:

Inflation forecast for FY24: ADB has revised its inflation forecast to 4.7% for FY24, up from its April projection of 4.6%, primarily due to rising food prices. Despite increased agricultural output expectations, food inflation remains a concern, preventing the RBI from implementing more accommodative monetary policies.

Future inflation trends: Inflation is expected to moderate in the coming years, with a projected decrease to 4.5% by FY26. ADB notes that while monetary policy may become less restrictive, it will not ease as quickly as previously anticipated due to persistent inflationary pressures.

External sector and risks:

Current account deficit: India’s current account deficit is projected to widen, reaching 1% of GDP by FY25 and further expanding to 1.2% in FY26. Geopolitical shocks and supply chain disruptions may exacerbate this deficit, alongside potential commodity price fluctuations.

Downside risks: ADB highlighted several downside risks for FY24, including geopolitical shocks that could affect global supply chains and commodity prices. Weather-related shocks could also pose risks to agricultural output. Additionally, failure to meet government capital expenditure targets may negatively impact growth.

India’s economy is on a solid growth trajectory, with ADB retaining its 7% forecast for FY24 and projecting faster growth of 7.2% by FY26. However, rising inflation and external risks, including geopolitical shocks and agricultural challenges, remain key concerns. Despite these headwinds, India’s steady economic resilience positions it well for continued growth in the coming years.

The International Monetary Fund (IMF) has revised upwards India’s growth forecast for the financial year 2024-25 to 7%, from its earlier estimate of 6.8%. This positive outlook is underpinned by the robust performance of domestic consumption, especially in rural areas.

In its latest World Economic Outlook (WEO) update, the IMF maintained its global growth projection for 2024 at 3.2%. However, the fund expressed concerns about potential risks to the global economy, including persistent inflation, geopolitical tensions, and policy uncertainties.

Despite a challenging global economic environment, India’s economy continues to demonstrate resilience. The IMF’s projection for India’s GDP growth in FY26 remains unchanged at 6.5%.

Key highlights from the IMF report:

• India’s GDP growth for FY24 is estimated at 7.8%.
• Consumer price inflation is projected to decline to 4.6% in FY25 and 4.2% in FY26.
• China’s economic growth is expected to slow down in the coming years due to property sector challenges.

Despite the optimistic outlook, India is not immune to global challenges. Rising inflation, although showing signs of moderation, remains a concern. Additionally, the country needs to address infrastructure gaps, create more jobs, and reduce income inequality to ensure sustained and inclusive growth.

The government’s role in fostering a conducive business environment, attracting foreign investments, and implementing structural reforms will be crucial in realizing India’s full economic potential.

High-frequency data indicates that the Indian economy is set to grow over 7 percent for the fifth consecutive quarter in Q1FY25. This positive trend aligns with the Reserve Bank of India’s (RBI) GDP growth projection of 7.3 percent for the first quarter of 2024-25, according to DK Srivastava, Chief Policy Advisor at EY India.

Key economic indicators for June 2024

• GST collections: Expected to surge by 8 percent to Rs 1.74 lakh crore. Quarterly GST collections reached Rs 5.57 lakh crore, marking a 10.2 percent increase compared to Q1FY24. Saurabh Agarwal, Tax Partner at EY India, highlights that the robust GST collections indicate a booming domestic consumption sector.
• Manufacturing activity: The HSBC India Manufacturing PMI rose to 58.3 in June from 57.5 in May, driven by strong domestic demand and increased new orders. Employment generation in manufacturing recorded its fastest pace since March 2005, despite overall tepid employment levels in FY24.
• Auto sales: Mixed trends observed with Maruti recording a 3 percent rise in sales, while Tata experienced an 8 percent decline compared to the previous year.
• UPI transactions: Exceeded Rs 20 lakh crore for the second consecutive month, with average daily transaction volume and value rising both sequentially and year-over-year.
• Coal production: Increased by 10.6 percent in the first quarter compared to the previous year.
• FASTag usage: Slightly lower than the previous month but still 6 percent higher year-over-year.
• Credit offtake: Continued growth at 19 percent as of the fortnight ending June 14.

Economic outlook and weather impact

• Weather conditions: The Ministry of Earth Sciences forecasts above-normal rainfall for July 2024, which is expected to boost consumption. June rainfall was 10.9 percent below normal, and reservoir levels were 17 percent below their long-run average.
• Inflation levels: Falling inflation is anticipated to support consumption, contributing to the overall economic growth.

Revised economic forecasts

Stronger growth in FY24 has led to multiple forecast revisions for the Indian economy. The RBI recently revised its FY25 growth outlook to 7.2 percent from the previous estimate of 7 percent.

The World Bank has revised its growth projections for the US economy, now anticipating a 2.5% growth rate in 2024, consistent with 2023 but significantly higher than the earlier estimate of 1.6%.

In its June 11 report, the World Bank maintained its GDP growth forecast for India at 6.6% for FY25. This follows an earlier adjustment in April, where India’s GDP growth projection was raised by 20 basis points to 6.6% for the current financial year. The global agency highlighted that India will continue to be the fastest-growing major economy, despite a slight moderation in its growth pace. After achieving high growth in 2023-24, India is projected to maintain steady growth of 6.7% annually on average over the next three fiscal years starting in 2024-25.

Key projections for India:

• FY25 GDP Growth: 6.6%
• FY26 GDP Growth: 6.7%
• FY27 GDP Growth: 6.8%

India’s GDP growth exceeded expectations, standing at 7.8% in the January-March quarter, although it was slightly slower than the 8.4% growth in the previous quarter. The full-year GDP growth for 2023-24 has been revised upwards to 8.2% from the second advance estimate of 7.6%, according to data from the Ministry of Statistics and Programme Implementation released on May 31.

The Reserve Bank of India anticipates a 7.2% growth rate for FY25.

Global economic outlook:

• Global GDP growth: 2.6% for 2024-25, 20 basis points higher than the January estimate
• FY26 & FY27 growth: Expected at 2.7%

The World Bank’s June 2024 Global Economic Prospects report indicates that global growth will stabilize at 2.6% this year, remaining steady for the first time in three years despite geopolitical tensions and high interest rates. Growth is projected to increase slightly to 2.7% in 2025-26, driven by modest improvements in trade and investment.

South Asia Region (SAR) forecast:

• 2024 GDP growth: 6.2%, down from 6.6% in 2023 due to India’s slower growth
• 2025-26 GDP growth: Expected to remain at 6.2%

Despite steady growth in India, the SAR region’s growth is expected to stay at 6.2% in 2025-26. Bangladesh’s growth will remain robust but slower than in recent years, while Pakistan and Sri Lanka are projected to strengthen. However, risks such as commodity market disruptions, fiscal consolidations, financial instability, severe weather events, and slower-than-expected growth in China and Europe pose significant threats to this outlook.

Inflation and Monetary policy:

• Global inflation: Expected to moderate, averaging 3.5% this year
• Central Bank policies: Likely to remain cautious, keeping interest rates about double the 2000-19 average

The World Bank notes that geopolitical tensions and trade fragmentation could disrupt global trade networks, with inflation persistence potentially delaying monetary easing. Conversely, quicker-than-expected global disinflation and stronger US economic performance are potential upside risks.