Indias Real GDP Growth to Moderate to 6.8% in FY25: Crisil Ratings

India's real GDP growth is projected to moderate to 6.8% in the fiscal year 2025 (FY2025), according to Crisil Ratings. This represents a slight decrease from the 7.6% growth expected in the ongoing fiscal year. The leading domestic ratings agency attributes this moderation to higher interest rates and tempered demand resulting from lower fiscal impulse.

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Sustained Growth Despite Moderation

Despite the moderated growth rate, Crisil emphasizes that India will maintain its position as the fastest-growing large economy. The government's commitment to narrowing the fiscal deficit to 5.1% in FY25, along with elevated inflation and risks of price rise, has prevented the Reserve Bank of India (RBI) from cutting interest rates after earlier hikes totaling 2.50 percentage points.

Government Spending and RBI Rate Cuts

Crisil notes that the nature of government spending will provide support to the investment cycle and rural incomes. The agency's chief economist, Dharmakirti Joshi, anticipates that the RBI will reduce rates by 0.50-0.75 percentage points in FY25. However, Joshi emphasizes that these cuts will be gradual, with the earliest one not expected before June. The RBI must first shift its monetary policy stance from the current withdrawal of accommodation to neutral before cutting rates.

Inflation and Growth Drivers

Crisil predicts that inflation will continue to soften in FY25 due to healthier agricultural output, which will tame food inflation, as well as benign oil and commodity prices. The agency believes that the growth momentum will persist throughout the decade, driven by significant private investments in emerging sectors, ongoing government spending on infrastructure, continuous reform efforts, and efficiency gains from increasing digitalization and physical connectivity.

India's Economic Milestones

Over the next seven fiscal years, the Indian economy is projected to surpass the USD 5 trillion mark and approach USD 7 trillion, with an estimated average annual growth rate of 6.7%. By FY31, India is expected to become the third-largest economy globally and an upper middle-income country, which will boost domestic consumption. Joshi predicts that India's per capita income will exceed USD 4,500 by the end of the current decade.

Manufacturing and Services Growth

Crisil projects that both manufacturing and services sectors will contribute to growth until FY31, resulting in a more robust growth trajectory. Manufacturing and services are expected to grow at 9.1% and 6.9%, respectively, between fiscals 2025 and 2031.

Private Capital Expenditure and Corporate Investments

Addressing concerns about private capital expenditure, Crisil reports that fixed investments by private companies have begun to rise and have ample room for growth, while government initiatives continue to boost infrastructure segments. Industrial capex is projected to increase to an annual average of Rs 6.5 lakh crore between fiscals 2024 and 2028, up from Rs 3.9 lakh crore in the preceding five fiscal years. Factors such as improved clarity on demand, the ability to invest due to deleveraged balance sheets, and higher profits are expected to drive corporate investments.

Investment Sources and Challenges

A senior official from Crisil reveals that a significant portion of investments in new-age sectors like semiconductors and green hydrogen will come from large domestic corporate houses or global multinationals. These corporate entities are likely to opt for bond borrowings rather than relying solely on bank lending.

Crisil also highlights near- and medium-term challenges posed by geopolitical uncertainties, global indebtedness, uneven economic recovery, climate change, and technological disruptions.

Government's Focus Areas

Joshi suggests that if the incumbent government retains a majority, it will prioritize reinitiating farm sector reforms, undertaking efforts to bolster manufacturing, and supporting the underprivileged through social security interventions.