News

Published: September 22, 2024
Updated: September 22, 2024

India’s Economic Outlook: Government Capex Set to Boost Growth Amid Inflation Ease

India’s economic momentum, which slowed in the first quarter of fiscal year 2024-25 due to reduced government capital expenditure ahead of the upcoming general elections, is expected to accelerate in the coming months. According to the finance ministry’s Department of Economic Affairs, the August Economic Review outlines a recovery driven by an uptick in public spending and investments.

Strengthening Rural Incomes and Moderating Inflation

Rural demand and income levels are projected to strengthen in the near term, with food inflation likely to subside, provided no severe climatic disruptions occur. The report suggests that these trends, coupled with steady oil prices, provide a favourable backdrop for economic recovery.

The review aligns with the growth estimates set forth in the Economic Survey for 2023-24, predicting a GDP growth rate of 6.5% to 7% for FY25.

Mixed Performance Across Sectors

While the economy shows signs of stability, there are emerging strains in specific sectors. For instance, the passenger vehicle segment witnessed a decline in sales, with a drop of 1.8% in August to 352,921 units, following a similar reduction in July. Additionally, the fast-moving consumer goods (FMCG) sector in urban areas also saw a slowdown during the first quarter.

Government consumption expenditure in Q1 FY25 was marginally lower than the same period last year, standing at ₹4.14 trillion, a slight decrease from ₹4.15 trillion in Q1 FY24. However, the central government’s overall capital expenditure for FY25 is pegged at ₹11.11 trillion, significantly higher than FY24's revised estimates of ₹9.5 trillion.

Stable Macroeconomic Foundations Despite Global Uncertainty

The Economic Review highlights the solid macroeconomic fundamentals of the Indian economy, marked by steady growth, investment, employment, and inflation control. India’s external sector remains resilient with a stable financial system and a comfortable foreign exchange reserve position. However, the global economic environment presents challenges, particularly amid anticipated policy rate cuts due to fears of a recession in advanced economies and ongoing geopolitical tensions.

Inflation and Interest Rates Outlook

Retail inflation in India remained below 4% for two consecutive months, reaching 3.65% in August. This marked the second-lowest inflation rate in 12 months, with July recording the lowest. The Reserve Bank of India (RBI) has maintained the repo rate at 6.5% since February 2023 to control inflation, though a reduction is expected as global central banks move towards lowering interest rates.

Potential Risks in Global Markets

The review also warns of potential risks arising from booming global stock markets. Recent policy shifts in some countries could lead to market corrections, which may have spillover effects globally, affecting India’s economic stability.

India’s economic trajectory appears poised for recovery, underpinned by stronger government spending, rural demand, and controlled inflation. However, uncertainties in global markets and sector-specific challenges will require careful navigation. Nevertheless, the overall outlook remains optimistic, with GDP growth expected to align with projections of 6.5-7% for FY25.