Indian Economy: New government can take solace in the economy’s robust outlook

India’s growth forecasts put it in a distinct sweet spot in comparison to the world economy at large.

The new government taking office in India can draw comfort from the optimism over India’s current economic outlook.

India’s GDP grew by 8.2 per cent in FY24. The growth is in line with expectations of the Indian economy being among the best-performing major economies of the world in FY25. Several global forecasts hold this view for India.

The International Monetary Fund (IMF) has forecasted India to grow by 6.8 per cent in FY25. The Asian Development Bank (ADB) expects the FY25 growth to be at 7.0 per cent. Projections by the Organisation for Economic Cooperation and Development (OECD), World Bank, Fitch, and Standard Chartered, indicate India to grow between 6.6-7.0 per cent in FY25.

India’s growth forecasts put it in a distinct sweet spot in comparison to the world economy at large. A growth rate of 6.6-7.0 per cent for India in FY25 will be far higher than the 3.2 per cent global growth projected by the IMF. It will also be well above those of the US and China, and major economic regions of the world, such as emerging and developing Asia, emerging and developing Europe, Middle East and Central Asia, Latin America & the Caribbean and the Association of Southeast Asian Nations (ASEAN).

The robust outlook for FY25 means India is well-positioned to achieve the kind of economic expansion that it requires for becoming the world’s 3^rd largest economy by the end of the decade, if not before.

What’s going good for India? Domestic demand is clearly one of the key drivers. Demand is being driven by both stable investments and consumption.

Public investments in building new infrastructure have been successful in enhancing internal connectivity. They’ve also generated incomes for project workers. Various public welfare programmes have enabled their targeted beneficiaries among the rural and urban poor to maintain household expenditures.

Domestic consumption demand has been backed by inflows of remittances. The latter comprise both internal and external remittances, from workers who have moved from their original locations within the country to work in other parts, and to other countries outside India. As the highest foreign remittance recipient in the world, many domestic households have benefitted from steady income flows that have enabled them to maintain healthy consumption.

Long-term investor optimism about the Indian economy has been driven by a liberal and exhaustive foreign investment policy. Foreign investors can now look at practically all sectors of the economy for both greenfield and brownfield projects, except a few prohibited industries (e.g. atomic energy, railway operations, lottery, gambling).

As a foreign investment location, India’s appeal has enhanced from liberal policies adopted for several sensitive and strategic sectors (e.g. banking, e-commerce, insurance, mining, defence, civil aviation, satellites, telecommunication). Allowing foreign investments in these sectors has enabled India to be visualized as an attractive ‘friendshoring’ destination for long-term investors looking to diversify sourcing and shift production as part of an overall ‘China +’ strategy.

More optimism for investors has arisen from India contributing actively to high-end functions of several global supply chains. These are manifesting through the roles of local specialists in idea-driven functions, largely innovative designs and their applications. More than a thousand global capability centres are now active in India and engaged in a broad range of specialist functions including R&D generating billions of dollars in revenues. It is hardly surprising therefore that prominent global businesses in knowledge-intensive, hi-tech sectors – Alphabet, Apple, Google, Micron, Microsoft, Nvidia – have committed to India in the long-term.

Looking ahead, domestic-market oriented growth prospects in India remain stable and promising, primarily due to the large young and rapidly urbanising population. This population is the key driver of ecommerce in the country responsible for pushing demand in communication, hospitality, digital payments and healthcare services.

The current macroeconomic conditions in India are indeed healthy and capable of maintaining a strong growth momentum. There are, however, a couple of concerns that need to be addressed for sustaining the optimistic investor outlook about the economy.

Headline inflationary tendencies need to be managed through an appropriate combination of policies. The challenge over here, from an investor perspective, is to ensure that business conditions in India remain competitive compared with other economies. High prices and high cost of living will require businesses paying higher wages and salaries for retaining workers. This might turn out to be challenging if profits squeeze. From the government’s perspective, the leverage over prices is often limited if they are influenced by external factors. External disturbances and disruptions, such as the Russia-Ukraine conflict and militancy in the Red Sea, can cause supplies to shrink and prices to rise, leaving the government with precise little room to manoeuvre.

A great part of the current optimism about India is due to the availability of good people. Higher premiums will incentivize many of the good to shift to global jobs. Skill shortages are already being felt in India in critical areas like healthcare providers and trained technical educators. It’s important to ensure that the skill shortage doesn’t become an impediment in the economy’s ability to be productive and respond effectively to the rising demand for goods and services.