GDP growth pegged at 7.5% in FY25, driven by strong govt capex: India Ratings

GDP Growth revised: India Ratings and Research (Ind-Ra) has raised its GDP growth estimate for FY25 to 7.5 per cent, up from its previous forecast of 7.1 percent. This revision places the estimate above the Reserve Bank of India's (RBI) forecast of 7.2 per cent. The upward revision is driven by ongoing growth momentum supported by government capital expenditure, deleverage corporate balance sheets, and the emerging private corporate capex cycle.

“The ongoing growth momentum led by government capex, deleverage balance sheets of corporates/banks, and incipient private corporate capex cycle has now found support from the union government budget. The budget promises to bolster agricultural/rural spending, improve credit delivery to MSMEs and incentivise employment creation in the economy.” India Ratings in a note said on Wednesday. 

Government capex and private sector investment drive growth

Ind-Ra attributes the growth momentum to significant government spending, including an Rs 11.1 trillion capex in the Union Budget FY25. Additionally, 26 states have budgeted Rs 9.5 trillion for capex in FY25, up from Rs 8.8 trillion in FY24. Although private sector capex has been slow to pick up, there are signs of revival, with 982 projects sanctioned in FY23 compared to 791 in FY22. Ind-Ra expects gross fixed capital formation (GFCF) to grow by 8.9 per cent in FY25.

In a press conference after the economic survey was tabled in both houses of parliament on July 22, Chief economic advisor, V. Anantha Nageswaran said, “ Private capex has recovered and has been growing after having seen a decline in 2021.”

Consumption demand expected to surge

Ind-Ra anticipates a significant increase in private final consumption expenditure (PFCE), which is expected to grow by 7.4 per cent in FY25, marking a three-year high. This growth is expected to be bolstered by measures announced in the Union Budget, aimed at boosting rural and lower-income household consumption. However, food inflation remains a risk, though retail inflation is expected to average lower in FY25 than in FY24, supporting real wage growth.

Sectoral growth: services, industry, and agriculture

On the supply side, the services sector is projected to grow by 8.0 per cent in FY25, with strong performance in financial services, real estate, and professional services. The industrial sector is expected to see a 7.4 per cent growth, supported by construction and manufacturing activities. The agricultural sector is forecasted to grow by 4.3 per cent in FY25, benefiting from an above-normal monsoon and robust Kharif sowing.

Retail inflation and fiscal deficit outlook

Ind-Ra expects retail inflation to moderate to 4.5 per cent in FY25, though it may remain above the RBI's target of 4 per cent for most of the year. Despite this, Ind-Ra believes that the RBI will maintain a cautious stance on policy rates.

The fiscal deficit target for FY25 has been revised down to 4.9 per cent of GDP, aided by better-than-expected tax collections and a windfall dividend from the RBI. Ind-Ra views this target as achievable given the current economic momentum and tax buoyancy.

Global trade and current account deficit

Ind-Ra projects goods and services exports to grow by 6.6 per cent in FY25, with imports expected to rise by 8.8 per cent. Despite challenges in global trade, India's current account deficit is expected to remain comfortable at 0.8 per cent of GDP, supported by remittances and software exports. Capital account flows are also expected to improve, leading to a net addition of $ 84.7 billion in forex reserves, which will help stabilise the Indian rupee.