GDP is expected to grow by 6.8% in fiscal year (FY) 2024-25, and this momentum is set to be sustained at similar rates throughout FY 2025-26 and 2026-27. Strong investment is the main driver of this robust performance, with accelerating public infrastructure outlays. Vigorous credit growth is supporting private investment. Farm output is recovering as an above-normal monsoon is lifting rural incomes, and will soon ease food prices and inflation. Export growth is projected to pick up slightly, but could be weaker, given ongoing global tensions.

Eventual disinflation will create space for monetary policy easing. Fiscal policy settings are prudent, with the general government deficit and debt on persistent downtrends, despite higher public investment. Labour supply is becoming a challenge for sustaining rapid GDP growth. Facilitating further structural shifts out of agricultural employment, including through improvements in educational attainment will be key. Also, greater focus is needed on fighting informality, boosting youth employment and raising female labour force participation.

Following real GDP growth of 8.2% in the last fiscal year, the expansion moderated somewhat in the first half of the current calendar year, but activity has remained buoyant, led by rising rural demand and incomes, accommodative macroeconomic policy settings and ample credit provision. Private consumption growth has picked up, but consumer confidence has flattened out, albeit with expectations of continued future improvement. While public consumption started the year on a weak note, associated monthly indicators point to a recent rebound. The business sector has experienced vigorous growth, with profits at a 15-year high relative to GDP, improving capacity utilisation and rising investment intentions. Labour markets are strong, after an apparent spike in joblessness earlier in the year quickly reversed, bringing unemployment back to 6.4% in the July-September quarter. Inflation eased to below 4% in the summer but has since jumped back above 6% due to a resurgence of food (especially vegetable) prices. Nevertheless, good sowing and a heavier-than-normal monsoon will eventually attenuate food-price pressures, ensuring that inflation will return to close to the Reserve Bank’s 4% target.

Foreign trade is no longer making the large contribution to demand that it made in FY 2023-24. The recent weakness in non-oil goods exports has been largely offset by falling oil import values. This, along with strength in services exports and remittance receipts, has resulted in a smaller current account deficit of less than 1% of GDP.

July’s Union Budget set a deficit target of 4.9% of GDP for FY 2024-25 and 4.5% of GDP for FY 2025-26 following the 5.6% of GDP realised in 2023-24, supported by significant dividend income, notably from the Reserve Bank. Including the States, the general government deficit should soon fall below 8% of GDP, supported by additional revenues from efforts to broaden the tax base. Similarly, government debt is declining relative to GDP, though still at around 80%, with interest payments at 19% of central government expenditure. Central government capital expenditure is set to grow almost 17% in FY 2024-25. The Union Budget underscored priorities in education and skills, employment, the middle class and small-business development. It announced multiple “employment-linked incentives” in the form of employer social-insurance holidays to encourage new hires. Additional public spending will be devoted to supporting youth training and internships, and to offer loans and loan guarantees for post-secondary students. Housing is to benefit from interest subsidies and possible State stamp-duty reductions. A new credit scheme is planned for small manufacturers, in addition to more public R&D funding. By contrast, food and fertilizer subsidies will be reduced substantially. Some tariffs are being adjusted, and a tariff structure review is being undertaken. Finally, personal tax brackets, standard deductions and tax-free amounts of long-term capital gains have been raised, while the short-term capital gains tax rate was increased; the corporate income tax rate for foreign firms was lowered from 40% to 35%; the so-called “angel” tax for investors in start-ups was abolished; and securities transaction taxes were increased.

The Reserve Bank has maintained its policy rate at 6.5%, although it recently revised its description of its stance as neutral, rather than withdrawing stimulus. Market rates have eased slightly. Falling inflation should allow some policy easing over 2025-2026 to sustain activity. According to the Reserve Bank, credit growth is vigorous, with annual increases of 18.0% to agriculture, 14.4% to micro and small firms and 10.2% to industry. Policymakers are trying to enhance public access to banking, credit and insurance, including by improving financial literacy, supporting small business and entrepreneurship more generally, especially by women, and developing digital public infrastructure and innovation, such as a unified payments interface.

GDP growth is projected to be steady at just under 7% per year over 2024-2026, led by fixed investment, notably in manufacturing, amid rapid increases in public infrastructure spending. Annual private consumption growth also is projected to remain strong at around 6%, so long as inflation eases. However, external demand will provide less support in the future, as past gains in both export performance and the terms of trade diminish. Inflation is expected to drop back to the 4% official target by 2026. The current account will remain in a small and easily financeable deficit.

The main macroeconomic risks come from abroad, notably a weaker economic environment and higher commodity import prices, associated with a worsening global geopolitical environment or greater protectionism. Competitiveness losses from comparatively less favourable tariff treatment in export markets could also prove more harmful. Domestically, financial risks associated with small retail investor exuberance and booming derivatives trading have increased. On the other hand, India’s strong position in technology services or greater utilisation of potential female labour resources could underpin even faster growth than projected.

India aims to reach advanced economy status by 2047, which requires sustaining strong per capita growth. Labour market challenges include the need to create 8 million non-farm jobs each year to accommodate projected demographic trends and the ongoing employment shift out of agriculture, which still occupies about 45% of the labour force. Stronger performance in this area will necessitate efforts to upskill the population, given that a quarter of all adults, including many women, were classified as illiterate in 2022. Labour market regulations including those restricting dismissals and overtime rules will also have to be balanced against their impact on labour costs. A greater focus on youth employment could help to reduce the 23.5% share of the youth population that is neither in employment, education or training. In addition, strong growth will require raising female labour force participation, which is only around 35%, and continuing efforts to reduce labour informality. Moreover, sustained high economic growth will facilitate the large energy investments needed to achieve net zero greenhouse gas emissions. Rising incomes will also enhance other dimensions of well-being, including longer life expectancy at birth, which fell by four years during the pandemic, and lower poverty. Achieving the latter, however, will also need further expansion of the social safety net and pension coverage.