India’s economic growth is projected to grow by 6.5 percent in the current and next financial year, according to an EY report. The report attributes the slower-than-expected growth in the September quarter to declines in private consumption expenditure and gross fixed capital formation.
Real GDP growth slowed to a seven-quarter low of 5.4 percent during July-September (Q2 FY2024-25), down from 6.7 percent in the preceding quarter. This decline was largely driven by the combined impact of private final consumption expenditure and gross fixed capital formation, which contributed to a 1.5 percentage point reduction in growth.
“Investment activity has notably decelerated, as evidenced by the growth rate of gross fixed capital formation, which stood at 5.4 percent in Q2 FY2024-25—a six-quarter low,” the report stated. It highlighted the subdued private investment demand and a contraction in government investment expenditure, which declined by 15.4 percent in the first half of FY2024-25. This negative trend persisted into October 2024, with government investment expenditure falling by 8.4 percent, leading to a cumulative decline of 14.7 percent over the first seven months of the fiscal year.
To meet the budgeted target of 17.1 percent growth in capital expenditure for FY2024-25, a 60.5 percent increase would be required in the remaining five months of the fiscal year, the report noted.
The EY Economy Watch December 2024 projects India’s real GDP growth at 6.5 percent for FY2024-25 and FY2025-26. It emphasizes the need to reform India’s fiscal responsibility framework to achieve the “Viksit Bharat” vision by 2047-48.
A recalibrated fiscal strategy is deemed essential for sustainable debt management, elimination of government dissavings, and fostering investment-led growth, paving the way for India’s transformation into a developed economy.
“With global uncertainties and fragmented international trade, India may need to rely heavily on domestic demand and services exports,” the report stated. It suggested maintaining annual real GDP growth at 6.5 percent in the medium term by accelerating government capital expenditure and developing a comprehensive medium-term investment pipeline involving both central and state governments, along with their public sector entities and the private sector.
The report proposed revising the 2019 National Infrastructure Pipeline (NIP) with new targets for key sectors like roads, smart cities, railways, power, and renewable energy, extending the plan up to 2030. It recommended that both central and state governments ensure infrastructure investment of at least 6 percent of GDP annually over a five-year period, which would require reducing revenue deficits to near zero.
The report also advised limiting the combined debt of the central and state governments to 60 percent of nominal GDP, equally split at 30 percent for each. It called for balancing current income and expenditure to boost national savings, potentially raising the savings rate to 36.5 percent of GDP. Adding 2 percent of GDP from foreign investments would elevate the total investment level to 38.5 percent, driving steady economic growth of 7 percent annually.
DK Srivastava, Chief Policy Advisor at EY India, underscored the importance of updating the Fiscal Responsibility and Budget Management (FRBM) Act. “The revised framework would eliminate government dissavings, enhance investments, and build a resilient economy equipped to meet future challenges. It is critical for achieving the Viksit Bharat aspirations,” he said.
The report called for reinstating revenue account balance as a key fiscal target for both central and state governments to eliminate government dissavings and enable productive investments. It recommended a fiscal deficit target of 3 percent of GDP for both levels of government, with flexibility for the central government to manage extraordinary situations, allowing deficits between 1 percent and 5 percent of GDP, subject to oversight by a fiscal council.
Eliminating revenue deficits would create space for investments expected to reach 6 percent of GDP by FY2048. Combined investments from households, businesses, and the public sector are projected to grow to 38.5 percent of GDP in real terms, driving sustained economic development, the report concluded.
