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India’s economic environment is full of spoken words on growth expectations as the country’s retail inflation rose to 6.21% in October from 5.51%, the highest it has been in the last 14 months. At 10.87%, food inflation was rather a cause of concern going beyond the RBI-sanctioned range of 2%- 6%. This warrants some significant questions concerning monetary policy and the stability of the economy, especially at this period of uncertainties.
Delivering his speech at New York’s central banking seminar, the RBI’s Deputy Governor painted a picture of India as a well-placed third-largest economy in terms of purchasing power parity. Official estimates for real GDP growth have been upgraded for 2024-25 to 7.2% and for 2025-26 to a range slightly below 7.0%, and may thereafter decline to 8%. Nonetheless, variations in the growth of third-party estimates from institutions such as ICRA, Morgan Stanley, and Moody all indicate a rather compounded path.
For Q2 FY25, ICRA’s earlier estimate of GDP growth at 6.7% in Q1 FY25 is now revised to 6.5%. Gross Value Added (GVA) on the same view is projected to drop from 6.8% to 6.6%.
The silver lining, though, is that resilience has been seen in the services sector and the kharif sowing season has been very robust. We estimate that growth in Agricultural GVA will improve to 3.5% from 2.0% while that of services GVA could improve to 7.8%. According to ICRA’s Chief Economist Aditi Nayar, there are contradictory signs with factors that might act as headwinds like interaction with heavy rainfall impacting various sectors besides margin pressure and at the same time with factors that are the tailwinds like the likelihood of higher capital expenditure post-parliamentary elections.
Morgan Stanley has recently lowered its growth estimate for FY25 from 7.0% to 6.7 % Q2 GDP growth was expected to be 6.3%. According to the brokerage, higher frequency data, is weak but expects a rebound in H2 FY25 due to better agrarian output, government consumption, and increased wedding demands.
The GDP of the country is expected to reach to 7.2% by 2024 according to the optimistic forecast provided by Mood’s & this figure would be much higher than those of other G20 economies including China. Multinationals’ momentum, supply chain diversification, and more are some of the reasons for the structural change the agency notes.
On the one hand, increasing inflation and challenges in the external environment will remain sensitive for India; on the other, the need for structural changes along with the optimal use of the flexibility provided by the monetary policy will be a challenge. However, the short-term outlook is slightly contradictory – a number of factors point to moderate to high growth rates, which strengthens India’s place within the G7/20 economies on the international stage.
Thank you
Regards,
Kautilya, IBS Mumbai.
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