Editorial 2 : Back on road to growth
Context
GDP figures show India is back on the road to growth.
The estimates
- The National Statistics Office’s (NSO) provisional estimates peg India’s gross domestic product (GDP) growth at 6.5 per cent for 2024-25, with the fourth quarter growing at a blistering 7.4 per cent.
- The positive surprises in GDP revisions seen in the past three fiscals may end here, at least for now. The economy seems to be realigning with its long-term trend growth.
- The decadal average growth before the Covid-19 pandemic was 6.6 per cent.
- In India’s GDP reporting framework, provisional estimates are more reliable and enduring than the two preceding advance estimates.
- India’s nominal GDP, which factors in the inflation rate, grew 9.8 per cent in fiscal 2025. Put another way, the size of the absolute economy reached $3.91 trillion from $3.6 trillion in fiscal 2024.
The trends
- Private consumption grew a good 7.2 per cent on rural demand even as urban stayed subdued.
- Government consumption expenditure, too, was restrained, growing 2.3 per cent for the full fiscal year and dropping to -1.8 per cent in the fourth quarter.
- Government investments picked up sharply in the fourth quarter, helping investment growth outpace GDP.
- Central government capex exceeded the revised estimates for the full fiscal.
- On the supply side, agriculture and services performed well, but manufacturing was a laggard, growing 4.5 per cent — slower than agriculture.
- Labour-intensive construction ratcheting up 9.4 per cent over the double-digit growth last fiscal augurs well for employment.
The coming year
- The economic outlook for fiscal 2026 will be shaped by global tariff shocks and India’s policy response.
- Though largely domestic-driven, India’s growing trade and capital ties with developed nations expose it to global disruptions.
- The external environment shifted significantly due to US-imposed tariffs and ongoing trade tensions.
- Direct effects include reduced US demand for Indian exports, as US growth is forecast to slow to 1.5% in 2025 from 2.8% in 2024.
- Indirectly, India could be hit by slower growth in key markets like the EU and Asia, with global GDP expected to fall to 2.7% in 2025 from 3.3% in 2024.
- Elevated US tariffs on China may worsen Chinese overcapacity, diverting goods to India. A temporary 115% tariff rollback between the US and China offers short-lived relief amid ongoing uncertainty.
India has buffers
- This uncertainty is stalling private investment and adding volatility to capital flows, markets, and currencies.
- However, India has buffers. Services exports, now nearly half of total exports, are less sensitive to global trade swings.
- While goods trade is expected to contract by 0.2% in 2025, services trade is projected to grow 4%.
- India’s low current account deficit, modest external debt, and $686 billion in forex reserves reduce risk exposure.
- Domestically, a strong wheat and pulses harvest, good monsoon forecast, and crude oil averaging $65 per barrel should help control inflation and support growth.
- Low food inflation will benefit lower-income households, boosting discretionary spending.
- Urban demand will also gain from tax cuts and low interest rates, supporting overall consumption.
- Despite subdued private investment and limited public spending capacity, India benefits from global supply-chain realignments.
- Apple will make most US-bound iPhones in India, and a Vietnamese EV firm is opening a plant here. Strong corporate balance sheets enable Indian firms to seize such opportunities.
Conclusion
Still, structural reforms are essential to enhance investment appeal and long-term growth. We expect GDP growth of 6.5% in FY26, with risks skewed to the downside.