India maintained its position as the fastest-growing G20 economy, with a real GDP growth of 8.2% in FY24. Although there was a slight deceleration to 7.8% YoY in Q4FY24, the growth from the previous quarter was revised upward to 8.6% YoY. The main driver of this growth over the past two years has been fixed investment spending, which grew by 9% in FY24 but slowed to 6.5% YoY in Q4FY24 due to a pause before the elections. Positive net exports of goods and services, along with restocking, further contributed to real GDP growth.
Buoyed by increased tax revenue, the fiscal deficit decreased to 5.6% of GDP in FY24, surpassing the budgeted estimate of 5.9%. This reduction is expected to encourage more investment in FY25.
With expectations of a La Nina-led above-normal monsoon boosting private consumption and investment spending, as well as an anticipated recovery in exports after the global trade recession, real GDP growth is projected to accelerate to 8.5% in FY25.
Furthermore, income tax revenue experienced significant growth in FY24, surpassing budgetary projections. This, along with growth in Corporate Tax and GST revenue, led to a moderation in both the fiscal deficit and the primary deficit. These lower deficits are expected to exceed the deficit-reduction target in FY25, thereby encouraging more private investment.
Additionally, CPI inflation is expected to decrease to below 4% YoY in Jul-Sep’24, allowing for a 25 basis points rate cut in Aug’24. With the anticipated above-normal monsoon and subsequent moderation in inflation, two rate cuts are expected before the end of FY25. This, combined with an acceleration in private consumption, improvements in net exports, and increased investment, sets the stage for 8.5% real GDP growth in FY25. Services are expected to return to their long-term average growth rate, while manufacturing and construction retain momentum from FY24. Any post-election reforms could further enhance these growth prospects.
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