IMF Projects India’s GDP Growth at 7% for FY25

IMF Projects India’s GDP Growth at 7% for FY25

The International Monetary Fund (IMF) has retained India’s GDP growth projection at 7% for FY25, reinforcing its confidence in the country’s strong economic recovery and resilience. This growth forecast positions India as one of the fastest-growing major economies globally. The IMF’s optimistic outlook is driven by strong domestic demand, improving investment, and robust government initiatives promoting economic expansion.

On a global scale, the IMF noted that the fight against inflation is mostly over, with many countries experiencing a significant reduction in inflationary pressures due to tight monetary policies. However, the IMF also issued warnings about emerging risks that could threaten economic stability, including geopolitical tensions, climate change, and potential financial market disruptions.

These factors suggest that while global inflation is under control, economies must remain vigilant and adaptable to handle the uncertainties posed by new threats.

World Bank Raises India’s Growth Forecast to 7% for FY25

The World Bank has raised its forecast for India’s economic growth to 7% for the fiscal year 2024-25, up from its previous estimate of 6.6%. This optimistic revision comes in light of a recovery in agriculture, an increase in rural demand, and robust government infrastructure investments, despite a slowdown in the April-June quarter due to lower government spending during national elections.

Key Drivers Behind Growth

Agricultural Recovery & Rural Demand
India’s agricultural sector has shown signs of recovery, with increased rural demand contributing significantly to the growth projection. This positive trend underscores the resilience of rural economies.

Infrastructure Spending
The government’s ongoing investments in infrastructure have played a crucial role in bolstering growth prospects, driving both short-term and long-term economic stability.

Challenges & Outlook

Unemployment
Despite the upward growth forecast, unemployment remains a key concern. The urban unemployment rate has averaged 17%, and addressing job creation will be critical for sustaining this growth.

Medium-Term Growth Prospects
The World Bank projects India’s average economic growth to remain strong, around 6.7%, over the next two fiscal years. Increased private investment is expected to support recovery in consumption and boost overall economic activity.

India’s Q1 FY25 GDP Data Highlights

• GDP Growth: India’s GDP growth slowed to 6.7% in Q1 FY25, marking the lowest growth rate in five quarters.
• Real GVA Growth: The Gross Value Added (GVA) at constant prices grew by 6.8%.
• Economic Impact: The slowdown is attributed to factors including global economic uncertainties and domestic challenges.
• Sector Performance: Key sectors such as manufacturing and services showed varied performance, influencing the overall growth rate.
• Policy Response: The government and RBI may consider policy adjustments to stimulate growth and address underlying economic issues.

Sectoral Performance

• Manufacturing and Construction: Manufacturing grew by 7.0% and construction by 10.5% in Q1 2024-25.
  • These figures are higher compared to 5% and 8.6% growth respectively in the same period last year.
• Agriculture: The agriculture sector posted a Gross Value Added (GVA) growth rate of 2.0%, a decline from 3.7% last year.
• Mining: GVA growth of 7.2% compared to 7.0% in the previous year.
• Services Sector:
  • Trade, Hotels, Transport, Communication & Broadcasting: GVA growth of 5.7%, down from 9.7% in the previous year.
  • Financial, Real Estate & Professional Services: Growth slowed to 7.1% compared to 12.6% last year.
  • Public Administration, Defence & Other Services: Grew by 9.5%, up from 8.3% in the same quarter last year.

Capital Expenditure (Capex)

• Government capital expenditure contracted sharply by 35% in Q1, and by 18% in April-July, attributed to the election phase.
• Private Final Consumption Expenditure and Gross Fixed Capital Formation have witnessed growth rates of 7.4 per cent and 7.5 per cent, respectively, during this period.

Current Status and Challenges

• Election Impact on Public Spending: The prolonged general election has significantly delayed public capital expenditure (capex), putting pressure on the government to intensify efforts to meet its spending targets.
• Private Consumption: Private consumption spending saw a rise partly due to easing headline inflation. However, food prices remain high.
• Monsoon and Agriculture: The monsoon has been better than last year but has been inconsistent in both time and space.
  • As a result, farm GVA growth reached a four-quarter high of 2%.
  • The upcoming weeks will be crucial in determining whether the agricultural sector truly recovers, which is necessary for cooling food inflation.
  • Projections of above-normal rainfall in September could negatively impact standing kharif crops, making this a key factor for the RBI to monitor.

Future Outlook

• RBI’s Concern: Members of the RBI’s independent monetary policy panel have suggested that a 1% GDP growth loss could occur this year and the next if interest rate cuts are delayed.
• Medium-Term Growth Expectations: India’s growth is still expected to be between 6.5% and 7% for this fiscal year.
  • However, growth is anticipated to decline to 6.5% in 2025-26.
  • The medium-term growth potential is likely stabilising around this figure, which is considered insufficient for the country’s needs.

India’s GDP Growth Rate in Two Phases (1950-2024)

The Indian Growth Story can be categorised into two categories to see the key drivers of growth:

Phase 1 (1950-2014)

• Low GDP growth below 5% for the last two years.
• High food inflation.
• Structural constraints hindering growth:
  • Slow project decision-making.
  • Inefficient subsidies.
  • Large informal sector.

Phase 2 (2014-2024): Transformative Growth

• Numerous structural reforms strengthened macroeconomic fundamentals.
• India became the fastest-growing G20 economy.
• Job creation and impressive post-pandemic recovery.
• Key reforms:
  • Goods and Services Tax (GST)
  • Insolvency and Bankruptcy Code (IBC)
  • Infrastructure development
  • Demonetization, credited for boosting cashless payments.

Image Credit: PIB

Check here: Economic Survey 2024 (Pre-General Election)

GDP Growth of India 2023-24

• After a contraction in FY21 due to the pandemic, the Indian economy has witnessed two consecutive years of growth exceeding 7 per cent, with indications pointing towards a third year of similar growth in FY24.
• In the first half of the current fiscal year, the economy has expanded by 7.6 per cent in real terms compared to the same period in FY23.
• Subject to unforeseen global developments, and considering historical growth trends in the second half, there’s a possibility that the overall growth rate for the fiscal year could surpass the Reserve Bank of India’s (RBI) projection of 7 per cent.
• According to the First Advance Estimates released by the National Statistical Office, India’s real GDP is anticipated to grow by 7.3 per cent in FY24, higher than the forecasts provided by various national and international agencies.
• India’s real GDP is estimated to grow at an average of 7.9 per cent between FY22 and FY24. Very few economies in the world, if any, have maintained the post-Covid recovery as consistently as the Indian economy has done.

Image Credit: PIB

India Remains Fastest-Growing Major Economy

The Finance Ministry has officially declared India as the fastest-growing major economy globally. In the July-September quarter of 2023-24, India recorded an impressive 7.6% economic growth, propelled primarily by stellar performances in the manufacturing, mining, and services sectors.

Key Contributors to Growth

Several factors have been instrumental in India’s economic surge, including robust domestic fundamentals, low inflation expectations, a surge in investment demand, a notable uptick in industrial activity, and sustained strength in domestic demand.

Global Economic Impact

India’s growth trajectory is poised to leave a substantial imprint on the global stage. Projections indicate that over the next five years, India’s growth is expected to contribute significantly, accounting for 12.9% of global economic expansion. This surpasses the projected share of the United States, which stands at 11.3%. India’s economic prowess positions it as a key driver of global growth in the coming years.

What is GDP of India?

GDP is the total monetary or market value of all finished goods and services produced within a country’s borders in a given time period. It serves as a comprehensive scorecard of a country’s economic health because it is a broad measure of overall domestic production. The government changed the base year for national accounts in January 2015 from the previous base year of 2004-05 to the new base year of 2011-12 and national accounting’s base year had already undergone revision in January 2010.

The Gross Domestic Product (GDP) at factor cost was abandoned in favour of the gross value added (GVA) at basic prices adopted by other countries in the new series by the Central Statistical Office (CSO).

Real vs Nominal GDP

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