New Delhi has lowered its GDP growth projections for the 2025 financial year even though economists say fundamentals remain strong
India’s economic growth for the second quarter (July-September) of the financial year from April 2024 to March 2025 stood at 5.4%, marking a seven-quarter low, according to government data. This resulted in an overall growth rate of approximately 6% for the first half of the fiscal year, a decline from the 8.2% growth observed during the same period in the previous financial year.
India’s Finance Minister Nirmala Sitharaman described the GDP decline in the July-to-September period as a “temporary blip.” The government expects the economy to recover by the end of this fiscal year, according to the Finance Ministry’s economic review for November 2024, released last month.
However, the document acknowledged that the world’s fastest-growing economy faced some challenges in the first half of the current financial year. It projected economic growth of around 6.5% for the 2025 financial year, a slight adjustment from the earlier range of 6.5% to 7%.
Additionally, it suggested that the Reserve Bank of India (RBI)’s monetary policy stance may have contributed to the demand slowdown in the first half of this year. In response, the RBI has significantly lowered its growth projection for the current fiscal year, revising it down from 7.2% to 6.6%.
International financial institutions have been overall bullish on India’s growth. In June, the World Bank had upwardly revised India’s GDP growth forecast for the current financial year 2024-25 to 6.6% from its earlier projection of 6.4%, made in January. The World Bank stated that India will remain the fastest-growing economy among the world’s largest, although its growth rate is expected to slow down.
The International Monetary Fund in July raised India’s growth projections for 2024 from 6.5% to 6.8%. Similarly, the United Nations revised the economic growth forecast for the country for 2024 upward, from 6.2% to 6.9%, citing strong public investment and resilient private consumption as key drivers.
However, after the second-quarter data was out, global brokerage firms were quick to revise projections. Morgan Stanley in December cut its GDP growth projection for India to 6.3% for this fiscal year, down from its earlier estimate of 6.7%. Despite this moderation, however, Morgan Stanley maintains an optimistic view for the second half of this fiscal, projecting a rebound in growth.
CARE Ratings, one of India’s leading credit rating agencies, in December revised downwards its GDP growth forecast for the ongoing fiscal to 6.5% from the 6.8% it had estimated earlier. It also noted, however, that the slowdown is expected to be temporary, as GDP growth is likely to pick up in the second half of the year, with the government increasing its spending and healthy agricultural production bolstering rural consumption.
Industry watchers have cited a combination of factors for this lower forecast. The slowdown in the July-to-September period was primarily due to reduced government capital expenditure, lower private-sector investment, decreased manufacturing activity (caused by geopolitical risks), inadequate job creation, and rising food prices.
Government spending slowed largely due to general and state elections, including the polls in Maharashtra, a key industrial state. Private-sector investment also lagged in the financial year 2025, impacted by global uncertainties, existing excess capacity, and concerns over dumping–where foreign goods, particularly from China, are sold in India at below-market prices, analysts noted.
India’s manufacturing sector growth slipped to a 12-month low in December, as per an industry survey report released by S&P Global on Thursday. The government data shows that the industrial sector grew by 6% in the first half of financial year 2025, down from 9.3% in the same period the previous year.
Inflation remained a challenge, with the country’s rate rising to 6.2% in October 2024, exceeding the Reserve Bank of India’s upper limit of 4%.
Jobs, too, remain a burning issue for the world’s most populous nation. In July 2024, India’s Prime Minister Narendra Modi announced that approximately 80 million new jobs had been created in India over the past three to four years, citing an RBI report.
For the last fiscal, RBI reported a 6% increase in employment, saying nearly 47 million jobs were added, bringing total employment to 643.3 million. However, economists interviewed by Reuters express concerns about the quality of these jobs, saying they were mainly in the informal or self-employment sectors.
At the same time, even though India’s small businesses in the manufacturing, trade and services sectors added about 11 million jobs in the year to the end of September, high inflation ate into wage gains. And youth unemployment continues to be particularly high: nearly 83% of the jobless population belonging to this demographic, according to the India Employment Report 2024 jointly published by the International Labour Organization (ILO) and the Institute of Human Development (IHD) in March last year.
Even with a slight slowdown, India’s economy is still growing faster than that of its powerful neighbor. The Chinese economy, the world’s second largest, has come under some stress in 2024 and, going forward, this is likely to continue.
Beijing set a growth target of “around 5%” this year, a goal it says it is confident of achieving. The figures will not be officially unveiled until the annual meeting of China’s parliament, the National People’s Congress, in March 2025. The World Bank in December raised its forecast for China’s economic growth, pegging it at 4.9% this year, up from its June forecast of 4.8%.
However, once US President Donald Trump takes charge, China is staring at the possibility of huge tariffs, which will put exports under pressure and impact its GDP, according to experts.
New Delhi contends that the recent slowdown in GDP growth does not reflect the broader economic trajectory for 2025. Finance Minister Sitharaman stated that the dip during the September quarter was not “systemic” and expressed optimism that increased public expenditure in the third quarter would counterbalance this moderation.
Growth momentum in the first quarter was affected by general elections and reduced capital expenditure, which also impacted the second quarter. During the first half of the current fiscal, the government utilized only 37.3% of its capital expenditure target of nearly $134 billion. “The purchasing power of Indians is improving, but there are concerns about wage stagnation within the country. We are fully aware of these factors that could influence domestic consumption,” Sitharaman acknowledged.
Despite the decline in GDP growth, Chief Economic Advisor to the government, Dr V. Anantha Nageswaran emphasized that India’s growth fundamentals remain robust and urged caution in interpreting the preliminary GDP estimates.
Commerce and Industry Minister Piyush Goyal acknowledged that policy decisions and infrastructure spending experienced a lag in the first quarter due to the elections. However, he highlighted positive indicators in the third quarter, such as increased festive spending, a rebound in rural growth, rising bank traction, and resumed infrastructure investments. “By the time we close the year in March, I believe we will be back on track,” Goyal said.
The call from the markets on an interest rate cut by RBI in February is bound to get louder, economists point out. It is generally postulated that interest rate cuts by the central bank help in higher borrowing, which helps in stimulating the economy.
Market expectations for an interest rate cut have intensified, according to The Mint, driven by moderating inflation and concerns over economic growth. Throughout 2024, the RBI maintained the repo rate at 6.5% to balance inflation control with GDP expansion. In December, Sanjay Malhotra was appointed the new RBI Governor, succeeding Shaktikanta Das. His appointment has led to market expectations of potential interest rate cuts in early 2025, with some analysts anticipating a reduction as soon as February.
India’s retail inflation softened to 5.5% in November 2024 from a 14-month high, driven by moderating food prices. The decline brought inflation back within the RBI’s acceptable range, raising hopes for a possible interest rate cut. However, prices for vegetables and edible oils remained high, indicating that careful monitoring is still necessary.