India’s GDP Growth to Slow to 6.4% in FY25: What This Means for the Economy?

Is India’s economic momentum faltering? Discover what the latest GDP estimates reveal about growth, investment, and policy shifts.

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What’s the news?

India’s economic growth is set to hit a four-year low of 6.4% in the fiscal year 2024-25, as revealed by the first advance estimates released by the National Statistical Office (NSO). This projection, a marked slowdown from the previous fiscal year’s 8.2% growth, underscores significant challenges in investment and manufacturing. As the government prepares for the Union Budget on February 1, the implications of this dip in growth will be closely watched by citizens, policymakers, and investors alike.

The decline in GDP growth comes amidst global uncertainties, tightening monetary policies, and subdued domestic investment. With the Reserve Bank of India (RBI) and the government revising their earlier optimistic forecasts, questions are being raised about the robustness of India’s economic recovery.

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In Short

RBI had earlier projected GDP growth at 6.6% for current financial year

India’s GDP growth projected to slow sharply to 6.4% in FY25

In FY24, GDP growth exceeded expectations at 8.2%

What the First Advance Estimates Reveal

The first advance estimates (FAE) for FY25 peg India’s GDP at ₹324 lakh crore, a nominal growth of 9.7% over FY24. At an exchange rate of ₹85 to a dollar, this translates to a GDP of $3.8 trillion. However, the real GDP growth rate of 6.4% represents the slowest pace since the pandemic-induced contraction in 2020-21.

These estimates are based on a variety of inputs, including:

• Index of Industrial Production (IIP) for April–October 2024.
• Advance crop production estimates for the ongoing fiscal year.
• Financial performance of listed firms in the first two quarters.
• Accounts of central and state governments.

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Factors Contributing to the Slowdown

1. Investment Weakness:
   A key driver of the slowdown is the deceleration in Gross Fixed Capital Formation (GFCF), projected to grow by just 6.4% in FY25 compared to 9% in FY24. This reflects muted future demand expectations, which can trigger a cycle of low growth.
2. Manufacturing Slump:
   Manufacturing growth is expected to plummet to 5.3% in FY25 from 9.9% in FY24. Weak global demand and higher input costs have weighed on this critical sector.
3. Sectoral Variations:
   While agriculture and allied sectors are set to grow by 3.8% (up from 1.4% in FY24), non-farm, non-government services have witnessed a significant slowdown.
4. Monetary Policy Effects:
   Tight monetary conditions, with high interest rates, have dampened both household spending and corporate borrowing.
5. Global Uncertainties:
   Geopolitical tensions and external volatility have further strained India’s trade and investment prospects.

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Policy Responses and Economic Implications

1. Union Budget 2024-25:
   The upcoming budget on February 1 is expected to outline fiscal measures to reignite growth. While balancing fiscal discipline with growth priorities will be challenging, targeted spending in infrastructure and social sectors could boost demand.
2. RBI’s Monetary Policy:
   The RBI’s Monetary Policy Committee (MPC) will meet from February 5-7 to decide on interest rate adjustments. Economists anticipate a pivot towards rate cuts, which could reduce borrowing costs and spur investment.
3. Fiscal Deficit and Revenue Collection:
   With nominal GDP growth at 9.7%, lower than the 10.5% assumed in the July 2024 Budget, achieving fiscal deficit targets of 4.9% for FY25 could prove difficult.

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How Does This Impact Indian Citizens?

1. Households:
   Potential interest rate cuts could ease mortgage payments and increase disposable income for middle-class families.
2. Businesses:
   Lower borrowing costs may support new investments, especially for small and medium enterprises (SMEs).
3. Employment:
   A slowdown in manufacturing and investment could impact job creation in key sectors, potentially increasing unemployment rates.

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Expert Insights

According to HSBC’s Chief India Economist Pranjul Bhandari, “The slowdown underscores the need for monetary policy support. Rate cuts of 25 basis points each in February and April could help revive growth, but external volatility remains a challenge.”

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Conclusion:

India’s projected GDP growth of 6.4% for FY25 reflects a significant loss of economic momentum, driven by weakened investment and manufacturing. As policymakers prepare for the Union Budget and RBI’s monetary policy review, the focus will be on balancing growth revival with fiscal prudence. The road ahead demands coordinated efforts to ensure that India’s growth story regains its strength amidst global and domestic challenges.

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