India should aim to secure at least 7% real GDP growth in FY25 in an environment of “macroeconomic stability”, the Reserve Bank of India (RBI) said in its monthly bulletin released on Thursday. “In India, potential output is picking up with actual output running above it, although the gap is moderate,” the RBI said in the “State of the Economy’ report.
Stating that the recent assaults on commercial vessels in the Red Sea trade route have placed significant strain on global supply chains, the report said on Thursday that, the situation imparted “considerable uncertainty to the near-term outlook for India’s merchandise trade.” Slowdown in exports has emerged as a drag on growth, but “the outlook is lighting up at new frontiers.”
According to the International Monetary Fund (IMF), the repercussions of the trade route disruption have been particularly pronounced in sectors such as petroleum, chemicals, non-metallic mineral products, mining and quarrying, as well as agriculture.
In the first three quarters of FY24, India’s overall exports were down 1.9% year-on-year. Inflation needs to align with the RBI target by the second quarter of FY25, as projected, and get anchored there, the RBI report said. The RBI has projected retail inflation based on Consumer Price Index (CPI) to average 5.4% in FY24; 5.2% in Q1 FY25, 4.0% in Q2; and 4.7% in Q3.
The report further said that balance sheets of financial institutions need to be strengthened and asset quality improved even further. “The ongoing consolidation of fiscal and external balances needs to continue.”
Moreover, on capex, the report said that the virtuous thrust to investment from government capital expenditure must be partnered and even led by the corporate sector, supplemented by foreign direct investment (FDI). It mentioned that the public capex push is starting to crowd in private investments.
In April-November this fiscal, the government spent Rs 5.86 trillion in capital expenditure, up 31.1% on year. However the capex during the period accounted for 58.5% of the BE as against 59.6% last year, meaning the Budget estimate of Rs 10 trillion could be missed.
The report, however, noted that global trade in goods and services grew at a tardy pace of 0.2% in 2023 – the slowest expansion, barring global recessions, in the past 50 years. “Significant headwinds continue to prevail (globally)– PMIs for new export orders remained in the contraction zone in December as export orders for both services and manufacturing recorded sequential declines,” the report said.
In FY24, India’s GDP is expected to grow 7.3%, according to National Statistical Office’s (NSO) first advance estimates. However, economists say NSO may be overestimating GDP growth, as the projection is based on only 7-8 months of data, and the second half is likely to record a steeper slowdown than seen by the NSO.
In H1, the economy had grown 7.7%, so to reach 7.3% in FY24, second-half growth will have to be 7%, which is unlikely, they say. Several high frequency indicators, such as manufacturing and services PMI, have started showing easing momentum in activity expansion.
The State of Economy report has been authored by several members of the RBI staff, including Deputy Governor Michael Patra, but doesn’t represent the views of the central bank.
“India is rapidly emerging as a global leader in hosting global capability centres (GCCs). The primary catalyst is the preference global corporations have towards owning their resources and locating them in India which boasts quality real estate, competitive rental rates, an extraordinary talent pool, and a consistently growing economy,” it said. It is estimated that by 2025, India will have 1900 GCCs with a market size of US $60 billion.
