Trend growth returns, but reforms key to sustain India's 6.5% GDP pace

The National Statistics Office (NSO) estimates India’s gross domestic product (GDP) growth for 2024-25 at 6.5 per cent, slightly above its initial estimate of 6.4 per cent but below that of forecasters and the Reserve Bank of India (RBI).

 

The NSO’s estimate marks a return to the pre-pandemic decadal trend growth rate, following an above-trend average growth of 8.8 per cent between financial years (FY) 2021-22 and 2023-24, driven by higher interest rates and lower fiscal stimulus. After the initial surge, the investment-to-GDP ratio is also stabilising.

 

India’s recovery from the Covid-19 pandemic has been marked by sharp upward revisions to growth estimates, but from a low base — the economy had contracted 5.8 per cent in FY21. The government's focus on infrastructure development, rapid digitalisation, and strengthening bank balance sheets helped script the fast rebound.

 

In FY26, we expect GDP to grow 6.5 per cent, driven by domestic factors, even as global uncertainties rise with the onset of tariff wars. S&P Global, in its recent outlook, notes that Asia-Pacific emerging economies (ex-China) are likely to be supported by domestic demand, leading to only a mild downward revision in the growth outlook for 2025. That said, risks to forecasts at this juncture are tilted to the downside.

 

High-frequency data is already flashing a slowdown in global growth. The Organisation for Economic Cooperation and Development recently revised its global GDP growth forecast for FY25 to 3.1 per cent from 3.3 per cent. In addition, world trade is expected to decelerate in the wake of increasing protectionism and insular industrial policies. The S&P-GEP Supply Chain Index also shows a rising underutilisation of global capacity.

 

At the same time, inflation forecasts have been revised upwards, especially in advanced economies, suggesting a more restrictive monetary policy ahead. The United States Federal Reserve has paused its rate cuts, with only one anticipated this year. Given the uncertain outlook, several other advanced-country central banks will give prominence to real-time data in their assessments.

 

India’s domestic factors provide reassurance in three key areas.

 

First, the increasing share of services in India’s total exports provides some buffer against global trade disruptions. The proportion has risen to about 47 per cent in FY25 from 31 per cent in FY12. Our analysis indicates that while India’s goods trade has closely followed global trends, services trade has maintained its own resilient path.

 

In the first 11 months of FY25, merchandise exports remained steady at $396 billion, almost in line with the previous year, while services exports showed healthy growth.

 

To be sure, India runs a trade surplus with the US (bulk of which originates in goods) and imposes higher tariffs on US imports than vice versa. So, the goods trade, with a sizeable contribution from micro, small and medium enterprises, is likely to see a greater impact.

 

Secondly, India’s external vulnerability indicators remain robust, with manageable current account deficit (CAD), low external debt servicing commitments, ample forex reserves, and a growth premium over other large economies.

 

Healthy external buffers have helped India weather global uncertainties and capital outflows. For example, between October 2024 and February 2025, foreign portfolio investors withdrew $22.7 billion from the Indian markets, compared with $22 billion of net inflows in the preceding six months. Despite this, the rupee’s depreciation has been orderly, unlike during previous stress periods.

 

Thirdly, we expect food inflation to ease, borrowing costs to reduce, and tax benefits for the middle class to support consumption and overall growth momentum. A significant reduction in food inflation after three years of above-trend rates of about 7 per cent will support discretionary spending, especially by low-income households from urban and rural areas that spend more on food.

 

Assuming normal monsoons and nil major weather events, healthy agricultural growth and lower food inflation are expected in FY26

 

The RBI’s rate cuts, which began in February with a quarter-point repo rate cut, are expected to be supplemented by an additional 75 basis points in FY26, providing mild support to growth as monetary policy actions take time to influence economic activity. Tight liquidity conditions, which the RBI is addressing, further slow the transmission process.

 

In addition, lower crude prices, projected to average around $70 per barrel in FY26, will help keep CAD and inflation in check, supporting GDP growth by reducing input costs.

 

Easing food inflation and lower crude prices will bring headline inflation closer to the RBI’s 4 per cent target in FY26. However, core inflation is expected to rise to 4.5 per cent from an estimated 3.5 per cent following a low-base effect and higher gold prices. With growth nearing its trend and crude and commodity prices remaining soft, the upside risk to core inflation is limited.

 

Investments will maintain their share in GDP in FY26. Investment activity in the government and household sectors has mainly led the economy’s recovery after the pandemic. Despite better financial flexibility, investments by the private corporate sector have remained tepid. The NSO’s sectoral data released in February, along with the second advance estimates, confirm this trend for FY24, and the situation is unlikely to have changed significantly in FY25.  In FY26 too, the corporate sector is unlikely to decisively take over the investment baton from the government amid rising global uncertainties, which typically lead to postponed investment decisions.

 

As the US imposes higher tariffs and raises trade barriers on Chinese imports, excess capacity and deflationary pressures in China are bound to result in its exports being diverted to other countries, including India, which already imports heavily from China. This also creates demand uncertainty for domestic producers. The imposition of safeguard duties on some of our imports shows that risk materialising.

 

The Centre has budgeted a 10.1 per cent growth in capital expenditure, which, if fully implemented, will be more supportive of growth in FY26. It is crucial to prioritise the creation of a pipeline of shovel-ready projects to minimise cost and time overruns in government projects. The same applies to state governments.

 

At 6.5 per cent GDP growth, India will maintain a leading position among large economies. Domestic factors will become increasingly important for the economy in the coming years as the world turns protectionist.

 

While India needs to forge trade alliances and take proactive steps to leverage the shift in supply chains due to trade disruption, economic reforms to address domestic bottlenecks should be the top priority.

 

In this context, swiftly enhancing the ease of doing business by reducing the compliance burden and simplifying regulations and laws are crucial levers to drive the growth marathon and achieve the Viksit Bharat goal by 2047.

 

The author is chief economist, CRISIL