India Ratings expects GDP growth to slow to 6.5% in FY25

New Delhi: India Ratings and Research has said it expects the Indian economy to grow 6.5% during FY25, down from the 7.3% growth it estimates for the ongoing fiscal year (FY24). The forecast is also a notch below the Reserve Bank of India's estimate of 7% GDP growth in FY25.

The ratings agency said India's economic recovery is on track thanks to sustained government capex, healthy corporate performance, deleveraged corporate and banking-sector balance sheets, continued softness in global commodity prices, and the prospect of a new private capex cycle.

However, it cautioned that consumption demand was still skewed in favour of households with the upper 50% of incomes. “A rise in input costs, if not adequately passed on to output prices, will reduce value addition and corporate margins,” said Sunil Kumar Sinha, principal economist, India Ratings and Research. "Given that consumption is not broad-based, producers will find it difficult to pass on the higher input cost to output prices," he added.

The agency also warned that India's exports, which have been affected by the global slowdown, could see more headwinds during the upcoming fiscal year. "Hit by the growth slowdown in advanced economies and rising trade distortions and geopolitical fragmentation, exports are likely to face global headwinds even in FY25," it said.

According to the government’s first estimates, the Indian economy will grow at 7.3% in FY24, faster than the RBI’s upwardly revised estimate of 7%. The World Bank expects the Indian economy to grow 6.3% in FY24, while the International Monetary Fund (IMF) recently revised its estimate from 6.3% to 6.5%.

Wage growth has been muted for several years, with average real wages growing at just 3.1% and household spending at a mere 3% during FY21-FY22, the ratings agency said.

"Such consumption demand is not sustainable. Perhaps this is the reason for [household spending] growth in FY24 plummeting to 4.4% (the lowest since FY03, barring the covid-hit FY21)," it added.

According to the first advance estimates from the government, private final consumption expenditure (PFCE) or household spending — the biggest driver of growth — is expected to rise at a moderate 4.4% annually to ₹97.74 trillion in FY24 after 7.53% in the previous fiscal year.

Meanwhile, India Ratings expects gross fixed capital formation (GFCF) – capex by the government and private firms – to grow 8.1% in FY25 (down from 10.3% in FY24), due to sustained government capex. GFCF is the second-largest component of GDP from the demand side, after PFCE.

India Ratings expects goods and services exports to grow 5.8% and imports to grow 8.8% in FY25, against 1.4% and 13.2%, respectively, in FY24. "Although global supply chains have largely recovered to pre-pandemic levels, the recent increase in the use of restrictive trade policies combined with subsidies and industrial policies aimed at localising production has accelerated the reshoring of activities in the US and European Union," it said.

"Continuation of this trend may pose new risks for India’s exports, besides the tighter monetary policy in advanced economies which is constraining economic activity and global trade," it added.

India's merchandise trade deficit narrowed to $17.49 billion in January from $19.80 billion in December, largely because imports declined to $54.41 billion from $58.25 billion in December. However, merchandise exports fell marginally to $36.92 billion in January from $38.45 billion in December.

On inflation, the rating agency expects the average retail and wholesale inflation to stand at 4.8% and 2.2%, respectively, in FY25, with the RBI expected to cut interest rates only during the second half of FY25.

"The RBI’s guidance with respect to retail inflation and its trajectory during the four quarters of FY25 suggests that retail inflation will be higher than the target of 4%. Therefore, RBI will remain cautious and watchful and is unlikely to change either the stance or the policy rate any time soon," it said.

"If the monsoon remains normal in 2024 and there are no adverse weather or geopolitical events, then the RBI may resort to monetary easing in the second half of FY25," it added.