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S&P Global has revised its growth projections for India, expecting a slowdown to 6.8% GDP growth for FY25, lower than its earlier estimates. The downgrade reflects concerns over high interest rates, reduced fiscal stimulus, and challenges in the global economy. S&P cited weaker urban demand and a softer construction sector as key contributors to this slowdown. This will raise broader regional concerns that will include changing US trade policies and tighter financial conditions. For FY26 and FY27, S&P expects growth to ease further to 6.7% and 6.8%, respectively.
The Finance Ministry in India appears to be more optimistic and is expecting growth in GDP to stabilize in the range of 6.5% to 7% in FY25 despite a slowdown from 8.2% in FY24. The Ministry has clearly underlined that many of the high-frequency indicators indicate bright spots, such as increase in rural and urban demand, rise in employment, and increase in manufacturing employment. While growth in exports might not be as impressive on account of weak demand from developed economies, the Indian services sector appears to be sound.
India's economy has likely slowed during Q2FY25 given the heavy rains, soft exports, and poor corporate performance. According to ICRA, the GDP growth for Q2 would be at around 6.5%, compared with 6.7% in Q1. But the Finance Ministry being cautiously optimistic - for obvious reasons of favourable conditions for agriculture, moderating inflation, and possibly showing support for growth in subsequent months - the outcome seems not too alarming either.
According to S&P's report, the Reserve Bank of India (RBI) would cut interest rates only once this fiscal year, and that too, because inflationary pressure, especially from food prices, is still a cause of concern. Retail inflation was at a 14-month high of 6.21% in October, mainly because of food inflation, which increased sharply to 10.87%. However, the RBI maintained the repo rate at 6.5%, an indication that cuts may take time to arrive.
China's stimulus measures are seen to support its economic growth, but S&P forecasts challenges for the country's economy, especially from US trade tariffs on its exports. Current trade tensions and increases in tariffs may further strain China's export sector, thus lowering general growth.
For the larger Asia-Pacific region, S&P predicts slower growth, weighed down by weaker global demand and the effect of US trade policies. Low interest rates and lower inflation will tend to cushion the impact a bit, restoring consumer spending power and backing regional economies, which should work. Taking all those uncertainties into view, there might just be some comfort to this economic outlook.
This happens mainly because of their role differences: S&P examines risk and long-term sustainability for wary estimates; and for the Finance Ministry, policies it believes will give that impetus to stimulate further growth and create an almost optimistic environment.
External as well as fiscal risks shape S&P's cautious optimism, but the Finance Ministry's confidence is premised on its economic management skills.
Thank you
Regards,
Kautilya, IBS Mumbai.
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