India Ratings and Research (Ind-Ra) projects a GDP growth of 6.5% for FY25, a modest decrease from the previous fiscal year's 7.3%. Despite this dip, the analysis suggests a robust economic recovery propelled by consistent government capital expenditure, strong corporate performance, and a balanced banking sector. The prospect of a forthcoming private corporate capex cycle adds a positive dimension to the outlook.
The report flags concerns about consumption demand, particularly in goods and services favored by households in the upper income bracket. While government capex drives aggregate demand, Ind-Ra emphasizes the necessity for a more diversified consumption demand growth, urging a focus on households with lower incomes. Although the private sector's greenfield capex remains sluggish, the report identifies signs hinting at the potential for a new cycle.
The
outlook for global exports in FY25 is challenging due to the growth slowdown in advanced economies and increased trade distortions/geopolitical fragmentation. India's goods and services exports experienced a negative growth rate of 0.14% during the first 10 months of FY24. Additionally, the rise in Wholesale Price Index (WPI) inflation, similar to the producers' price index, poses concerns for gross value added (GVA) and corporate profitability in FY25. WPI, which was in deflation from April to October 2023, has shifted to inflation since November 2023.
“A rise in input cost, if is not adequately passed into output prices, will reduce value addition/corporate margin. Given that consumption is not broad-based, producers will find it difficult to pass on the higher input cost to output prices,” says Sunil Kumar Sinha, Principal Economist, Ind-Ra.
Ind-Ra anticipates Government Final Consumption Expenditure (GFCE) to grow at 4.2% YoY in FY25, underscoring the ongoing significance of government capex. Despite a shift in focus, the report projects Gross Fixed Capital Formation (GFCF) to grow at 8.1% YoY, sustained by government capital expenditure.
The report issues a caution regarding challenges for India's exports in FY25, citing global headwinds such as a growth slowdown in advanced economies and rising trade distortions. Despite the recovery of global supply chains, restrictive trade policies pose risks. Ind-Ra expects goods and services exports to grow at 5.8% YoY, navigating these challenges.
In terms of sectoral insights, Ind-Ra provides a forecast of 7.3% YoY growth in the services sector for FY25. The report notes concerns about monsoon rainfall and industrial growth. On inflation, it expects retail and wholesale inflation at 4.8% and 2.2%, respectively, in FY25. The fiscal deficit target of 5.1% of GDP for FY25 is considered challenging but achievable, backed by better-than-expected revenue collections.
Despite concerns over negative net exports, Ind-Ra expects the current account deficit to remain manageable at 1.4% of GDP in FY25. The agency anticipates an improvement in capital account flows, contributing to a net addition of USD 68.4 billion in forex reserves, providing stability to the Indian rupee.
