India Ratings pegs FY25 GDP growth at 6.5%, says signs 'bullish' for private capex

Continued reforms should maintain India's status of being the fastest-growing large economy, Jefferies Equity Research outlook said

India's GDP is expected to grow by 6.5 percent in 2024-25, according to India Ratings and Research. While this would represent a decline from the statistics ministry's first advance estimate of 7.3 percent for the current financial year, the prospect of the private investment cycle bodes well for the economy.

"Private corporate sector investment has been down and out for nearly a decade," said Sunil Kumar Sinha, principal economist at India Ratings, on February 22.

"But when we look at lead indicators, all of them are indicating that at the current juncture the private corporate sector is once again becoming more bullish about investments. It may or may not be happening on the ground in the way we would like it to, but some flavour of that has already started becoming clearer at least in terms of intentions and the way they (corporates) are now approaching banks to finance their projects," Sinha added.

According to India Ratings, Rs 3.53 lakh crore was raised in 2022-23 to finance a total of 982 large projects – those of over Rs 1,000 crore. This is significantly higher than the Rs 1.98 lakh crore raised to finance 791 such projects in 2021-22.

According to Sinha, while its still "early days" for the private capex cycle, companies are also gaining confidence from their belief that the likelihood of another shock is low, with the last few years seeing several of them, such as the Covid pandemic and Russia's invasion of Ukraine. With demand picking up, capacity utilisation in the private sector should start rising from the current aggregate level of 75 percent. Meanwhile, certain segments such as cement and steel, have already seen their capacity utilisation levels cross 80-85 percent. As such, investment has already begun taking place in those sectors.

Source: India Ratings and Research

"Of course, much would depend on the overall macro situation. If the general election puts the current government back in power, then the pace of private corporate investment may be faster because there will be a continuity," Sinha added.

The Lok Sabha elections are expected to be held in April-May.

On the consumption side, India Ratings expects private final consumption expenditure to grow by 6.1 percent in 2024-25, up from 4.4 percent in 2023-24. However, the agency's economists caution that the current consumption trend – which is skewed in favour of goods and services purchased largely by those in the upper income bracket – is not sustainable. For sustained growth in consumption, demand for goods and services consumed by households belonging to the lower income bracket also has to pick up, India Ratings said in its outlook for next year.

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In terms of inflation, India Ratings' forecast is broadly in line with that of the Reserve Bank of India, with Consumer Price Index (CPI) inflation seen at 5.0 percent in the first quarter of 2024-25 before easing to 4.1 percent in July-September.

"The major difference is in the third quarter, where the RBI expects inflation to go up to 4.6 percent. Our forecasts suggest 5.5 percent," said Devendra Pant, India Ratings' chief economist.

For 2024-25 as a whole, India Ratings' forecast for headline retail inflation is 4.8 percent, 30 basis points higher than the Indian central bank's projection of 4.5 percent.

"The RBI's guidance with respect to retail inflation and its trajectory during the four quarters of 2024-25 suggests that retail inflation will be higher than the target 4 percent. Therefore…RBI will remain cautious and watchful and is unlikely to change either the stance or the policy rate any time soon. If monsoon remains normal in 2024 and there are no adverse weather or geopolitical events, then the RBI may resort to monetary easing in second half of 2024-25" India Ratings said.

On February 8, the RBI left the policy repo rate unchanged at 6.5 percent for the sixth meeting in a row.