A recent EY report said India’s economy is likely to grow by 6.5 per cent in the current and the next financial year. It attributed the growth number to lower than anticipated expansion in the September quarter to a fall in private consumption expenditure and gross fixed capital formation. For the second quarter of the current Financial Year 2024-25, the Real GDP growth eased to a seven-quarter low of 5.4 per cent.
This was compared to 6.7 per cent in the preceding quarter. This was primarily because two domestic demand components — private final consumption expenditure and gross fixed capital formation — together accounted for a fall of 1.5 percentage points, the report said.
The EY Economy Watch December 2024 forecasts India’s real GDP growth at 6.5 per cent for FY25 (April 2024 to March 2025 fiscal year) and FY26. It also highlights the importance of reforming India’s fiscal responsibility framework to achieve the Viksit Bharat vision by 2047-48.
A recalibrated approach is vital for sustainable debt management, eliminating government dissavings, and driving investment-led growth, paving the way for India’s transformation into a developed economy, it said.
“One outstanding feature of demand is the slowdown in investment, as reflected in the growth of gross fixed capital formation. This growth is estimated at 5.4 per cent in 2QFY25, which is a six-quarter low. Apart from the fact that private investment demand has not picked up, there was a contraction in Government of India’s investment expenditure growth, which has remained negative at (-)15.4 per cent in the first half of FY25,” the report said.
It said that with global conditions remaining uncertain and global trade likely to be fragmented, India may have to continue to rely largely on domestic demand and services exports.
In the medium-term, India’s real GDP growth prospects can be kept at 6.5 per cent per year provided the Government of India (GoI) accelerates its capital expenditure growth in the remaining part of the current fiscal year and comes up with a medium-term investment pipeline with participation from the GoI and state governments and both their respective public sector entities, and the private corporate sector.
EY Economy Watch goes on to suggest that the total debt of the Central and state governments combined should not exceed 60 per cent of the country’s nominal GDP, with each taking an equal share of 30 per cent.
It also emphasizes the need for both levels of government to balance their current/operating income and spending, which would boost national savings.
This would lead to a savings rate of about 36.5 per cent of GDP in real terms. Adding another 2 per cent of GDP from foreign investments would bring the total real investment level to 38.5 per cent, helping India achieve steady economic growth of 7 per cent per year.