India's economy is poised for a strong recovery in 2025, driven by solid growth prospects, a potential interest rate cut and improving domestic demand, despite global challenges
India will have to navigate geopolitical headwinds, tame domestic inflation and nudge the private sector to further loosen their purse strings as the world's fastest-growing major economy seeks more purple patches in 2025, leaving behind September quarter growth blues.
Economists at the Reserve Bank of India (RBI) say that high-frequency indicators for the third quarter of 2024-25 indicate the economy is recovering, driven by strong festival activity and a sustained upswing in rural demand.
In what has been described as a "temporary blip" by Union Finance Minister Nirmala Sitharaman, the country's economic growth slid to a seven-quarter low of 5.4 per cent in the July-September period after clipping a healthy rate of 7-8 per cent.
With the growth versus inflation debate leaving the finance ministry and RBI on different pages, all eyes will also be on possible interest rate cuts in February when the central bank's monetary policy panel meets for the first time under the new Governor Sanjay Malhotra.
The panel meeting will come close on the heels of the 2025-26 Union Budget that will lay out the Modi 3.0 government's economic and fiscal roadmap, especially in the context of global tensions and the upcoming Donald Trump presidency in the US.
All said, experts are of the opinion that India's prospects are bright as macroeconomic fundamentals are strong.
For 2024-25, the real GDP growth is projected at 6.6 per cent and 6.9 per cent for the first quarter of 2025-26. In the next fiscal, the June quarter expansion is pegged at 7.3 per cent, as per the Reserve Bank of India (RBI).
Experts opined that the course of the global economy will also depend a lot on the policy initiatives of Trump who will take over as the US President on January 20.
And current volatility in securities and currency markets in India as well as other countries cannot be discounted.
"The prospects for the Indian economy look bright for the coming year and we can expect growth to cross the 7 per cent mark on top of 6.6-6.8 per cent expected for FY25," said Madan Sabnavis, Chief Economist, Bank of Baroda.
The smoothening of inflation in the coming months will be the one factor driving consumption in the upward direction, which in turn will help to increase private investment in the consumer goods segment - which has been missing so far, he added.
Experts also said that an interest cut, which has been on hold since February 2023, will be a big booster for the economy as and when the RBI decides to take a call on it. The benchmark short-term lending rate has remained unchanged at 6.5 per cent since February 2023.
ICRA Chief Economist Aditi Nayar noted that the economic outlook for the Indian economy appears quite bright from a domestic point of view, amidst rising uncertainty globally, stemming from geopolitics and conflicts, the pace of Central Bank easing and commodity prices, threats of tariffs etc.
"The upcoming FY2026 Union Budget, which is expected to reveal the new medium-term fiscal path, and later, the recommendations of the next Finance Commission will set the tone for the fiscal policy. Private sector capacity addition may remain somewhat circumspect given the global uncertainties, and their attendant impact on exports," she said.
The rupee may remain in the headlines, as it has in the last month, Nayar said.
The government on its part is committed to fiscal prudence, according to the latest Finance Ministry report.
The Union Government is committed to pursuing the glide path of fiscal consolidation as announced in the Budget for FY 2021-22 and to attain a level of Fiscal Deficit lower than 4.5 per cent of GDP by FY2025-26, it added.
The thrust, the ministry said, will be on improving the quality of public spending, while at the same time, strengthening the social security net for the poor and needy.
"This approach would help further strengthen the nation’s macro-economic fundamentals and ensure overall financial stability," it said.
Finance Minister Nirmala Sitharaman, while replying to a discussion in Parliament, said that the lower-than-expected GDP growth of 5.4 per cent in the second quarter was a "temporary blip" and the economy will see healthy growth in the coming quarters.
The latest RBI report, the Indian economy and financial system remain strong and stable underpinned by sound macroeconomic fundamentals, healthy balance sheets of banks and non-banks and low volatility in financial markets despite some qualms about global spillovers.
"Despite this recent deceleration, structural growth drivers remain intact. Real GDP growth is expected to recover in Q3 and Q4 of 2024-25, supported by a pick-up in domestic drivers, mainly public consumption and investment, strong service exports and easy financial conditions, the report added.
It is to be noted here that the Finance Ministry in its November Monthly Economic Review had raised concerns that the possibility that structural factors may also have contributed to the slowdown in H1 should not be ruled out.
RBI Governor Sanjay Malhotra, in his foreword to the Financial Stability Report, said notwithstanding the uncertainties shrouding the global macro-financial ethos as it unfolds, prospects for the Indian economy are expected to improve after the slowdown in the pace of economic activity in the first half of 2024-25.
"Consumer and business confidence for the year ahead remain high and the investment scenario is brighter as corporations step into 2025 with robust balance sheets and high profitability," said Malhotra who took over as 26th Governor earlier in December.
According to the International Monetary Fund, downside risks, such as escalating geopolitical tensions, uncertainty about trade and industrial policies in the aftermath of major global elections, and potential tightening of financial conditions, however, could drag global output lower from baseline projections.