India’s economy is expected to grow at 6.5 per cent in FY25 and FY26, despite challenges from weak private consumption and reduced government spending, according to the EY Economy Watch December 2024 report.
The GDP growth rate fell to a seven-quarter low of 5.4 per cent in the July-September period, down from 6.7 per cent in the previous quarter. The Reserve Bank of India (RBI) has revised its real GDP growth forecast for FY25 to 6.6 per cent during its latest Monetary Policy Committee (MPC) meeting.
Investment slowdown impacts growth
The EY report attributed the slowdown in GDP to declining private consumption expenditure and gross fixed capital formation.
“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 Q2FY25, marking a six-quarter low. Private investment demand remains subdued, while government investment expenditure has contracted sharply, recording negative growth of (-)15.4 per cent in the first half of FY25,” the report stated.
Spending freeze and its causes
The report cited elevated prices and stagnant wages, particularly in urban areas, as key factors behind lower consumer spending. The RBI has emphasised that unchecked inflation could further harm economic prospects, particularly in industrial production and exports.
Encouragingly, retail inflation (CPI) fell to 5.48 per cent in November, down from 6.21 per cent in October, while wholesale inflation (WPI) moderated to 1.89 per cent from 2.36 per cent over the same period. These trends are expected to ease pressure on household budgets.
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However, rising household debt, driven by increased retail borrowing such as personal loans and credit card usage, has restricted discretionary spending. As more income is allocated to debt repayment, overall consumption continues to be impacted.
Government spending remains subdued
Government spending has shown persistent contraction, recording a negative growth rate of (-)8.4 per cent in October 2024. Over the first seven months of FY25, government investment expenditure growth remained negative at (-)14.7 per cent.
To meet its budgeted capital expenditure target of 17.1 per cent growth over FY24, the government now requires a growth rate of 60.5 per cent in the remaining five months of FY25.
EY’s recommendations for recovery
The EY report stressed the need for increased government spending and a stronger focus on domestic demand and services exports, particularly amidst global trade uncertainties.
For sustained economic growth, the report suggested accelerating capital expenditure and implementing a medium-term investment pipeline involving central and state governments, public sector entities, and private corporations.
Additionally, the report advocated for limiting total central and state government debt to 60 per cent of nominal GDP, with equal shares of 30 per cent each. Increasing the national savings rate to 36.5 per cent of GDP and attracting 2 per cent from foreign investments could boost real investment to 38.5 per cent of GDP, enabling India to sustain 7 per cent annual growth in the medium term.