India’s Economic Outlook

By Nikunj Ohri and Shivangi Acharya

NEW DELHI (Reuters) – India’s economy is expected to maintain a sluggish growth rate next fiscal year due to global risks, according to a finance ministry report urging states to implement business reforms.

The annual Economic Survey, presented by Finance Minister Nirmala Sitharaman, projects GDP growth between 6.3% and 6.8% for the upcoming fiscal year starting April 1, following a dip to a four-year low this year from 8.2% last year.

Authored by Chief Economic Adviser V. Anantha Nageswaran and his finance ministry team, the report describes a balanced risk outlook for India’s economy next year. “Rural demand, supported by improved agricultural production, expected easing of food inflation, and a stable macroeconomic environment, provides an upside for near-term growth,” said Nageswaran.

However, geopolitical tensions, trade uncertainties, and potential commodity price shocks present challenges. Initial growth projections have historically been inconsistent, but this year’s estimate of 6.4% aligns with an initial projection of 6.5%-7%.

Aditi Nayar, an economist at ICRA, remarks that the forecast range is suitable given the global uncertainties. ICRA anticipates 6.5% growth for 2025/26.

In his third term’s first full budget, Prime Minister Narendra Modi is expected to support the world’s fifth-largest economy where high prices and slow wage growth hinder consumption. The budget presentation is scheduled for Feb. 1 at 0530 GMT.

Economists predict tax cuts to enhance the spending power of India’s large middle class and tariff reductions to stimulate local manufacturing.

Easing Inflation

Food inflation is expected to decrease in the January to March quarter due to seasonal declines in vegetable prices and good crop arrivals. Estimates suggest retail inflation will align with the central bank’s target, although adverse weather and rising international agricultural prices could pose risks.

India’s retail inflation dropped to a four-month low of 5.2% in December. Nonetheless, food inflation remained high at 8.39%, with vegetable prices soaring at 26.56%.

The nation aims for a 4% headline inflation target set by the central bank’s rate-setting panel, with a tolerance band of 2 percentage points. The panel is predicted to cut rates during its meeting on Feb 5-7 for the first time in over four years.

Deregulation as a Priority

While near-term growth aligns with the 10-year average, achieving an 8% growth rate is essential for India’s long-term economic aspirations, as noted in the survey. Both Indian states and the central government must prioritize systematic deregulation.

Key areas for regulatory easing include land, labor, and factories, according to the survey. Without deregulation, other policy initiatives are unlikely to yield the desired growth outcomes, emphasized Nageswaran.

The slower performance of the manufacturing sector and reduced corporate investments contribute to the anticipated 6.4% growth rate in 2024/25.

Additionally, India’s complex regulatory environment is often cited as a barrier to private investment initiatives, exemplified by a significant decline in foreign direct investment, which dropped from $8.5 billion a year prior to $479 million between April and November 2024, according to Reserve Bank of India data.