India Ratings Raises GDP Estimate To 7.5% As Government Capex Drives Growth

The Union budget FY25 allocated Rs 11.1 lakh crore for capex, indicating the government's continued emphasis on infrastructure spending, it said. Further, 26 states have allocated Rs 9.5 lakh crore for FY25, an increase from Rs 8.8 lakh crore in FY24. India Ratings expects gross fixed capital formation to increase by 8.9% year-on-year in FY25. 

Although private sector capital expenditure remains low, there are signs of improvement, it said, with banks and financial institutions authorising 982 projects worth Rs 3.53 lakh crore in FY23—up from 791 projects for Rs 1.98 lakh crore in FY22.

Crude oil, base metals, power, telecom, cement, chemicals, textiles, healthcare and logistics are among the sectors experiencing increased capex activity, according to it.

Since FY23, the government has turned its priority to capex, resulting in slow growth in government final consumption expenditure. Although GFCE played an important role in boosting the economy between FY16 and FY20, subsequent revenue expenditures have been kept under control, the report said.

The Union government's revenue spending, which rose to 15.5% of GDP in FY21 due to the pandemic, is expected to fall to 11.4% in FY25. India Ratings estimates GFCE to expand 4.4% YoY in FY25, up from 2.5% in FY24. 

The ratings agency forecasts private final consumption expenditure to rise by 7.4% YoY in FY25, as compared to 4% in FY24.

This increase is attributed to an above-normal monsoon and budget measures aimed at boosting demand among lower-income and rural households, despite ongoing food inflation risks.

Thanks to a windfall dividend from the RBI, the Union government has revised its fiscal deficit target for FY25 to 4.9% of GDP, matching India Ratings’ assessment. Improved revenue collection, particularly tax collection, supports this target, the research agency said.

Given the GDP growth momentum and tax buoyancy, achieving a fiscal deficit of 4.9% of GDP in FY25 seems feasible, it said.

• Global Trade Showing Momentum: Exports are projected to grow by 6.6% YoY and imports by 8.8% YoY in FY25, as against 2.6% and 10.9% in FY24, respectively. This is despite the risks of global trade fragmentation and increased global supply concentration.

• Current Account Deficit to Remain Comfortable: India's import bills are expected to grow at 5.7% YoY in FY25, while exports are estimated to grow at 5.1%. The trade deficit is forecast at $268.5 billion, but remittances and software exports may help keep it at $29.7 billion, according to India Ratings. The current account balance and net FDI are also expected to improve, and capital account flows are expected to rise to $111.4 billion in FY25. India Ratings has assumed conservative $15 billion inflows due to India’s inclusion in the JPMorgan EM Bond Index. This will help the Indian rupee average at Rs 84.69 against the USD in FY25, said the report.

• Services, Industry and Agri Growth Encouraging: The services sector is forecast to grow by 8% YoY, while industrial growth is expected at 7.4% YoY. Agriculture should benefit from an above-normal monsoon, with a projected growth of 4.3% YoY. Financial services, real estate and professional services are expected to lead the growth in the services sector, and construction and manufacturing are expected to lead the industrial growth, according to the report. 

• Retail Inflation Declines, RBI To Remain Watchful: India Ratings expects the average retail and wholesale inflation to come in at 4.5% and 3.2%, respectively, in FY25. The RBI is expected to maintain a cautious stance due to persistent food inflation, particularly in cereals and pulses, and a surge in vegetable prices. Retail inflation is expected to exceed the target 4%, and the RBI is unlikely to change its stance or policy rate in FY25, it said.