Introduction
In a significant development for the Indian economy, Fitch Ratings has revised its growth forecast for India's Gross Domestic Product (GDP) in the fiscal year 2024-25. This adjustment reflects a positive outlook for the world's fifth-largest economy, driven by robust consumer spending and increased investment.
Fitch revises India's growth projection to 7.2% (PC: Reuters)
Revised Growth Forecast
On June 18, 2024, Fitch Ratings announced an upward revision of India's GDP growth forecast for the current fiscal year (FY 2024-25) to 7.2%, a 0.2 percentage point increase from its earlier projection of 7% in March. This adjustment aligns with the Reserve Bank of India's (RBI) recent upgrade of its own GDP estimate to 7.2% for the same period.
Factors Driving the Revised Forecast
1. Consumer Spending Recovery:
Fitch attributes a significant portion of this growth to an anticipated recovery in consumer spending. The rating agency notes elevated consumer confidence as a key factor contributing to this resurgence in consumption.
2. Continued Investment Growth:
While investment is expected to continue rising, Fitch predicts a slower pace compared to recent quarters. Nevertheless, this sustained investment growth remains a crucial driver of the economy.
India is on the verge of an economic boom. Shutterstock
3. Strong Performance in FY 2023-24:
The upward revision is partly based on India's robust economic performance in the previous fiscal year. For FY 2023-24, real GDP expanded by 8.2%, surpassing Fitch's earlier expectations. Domestic demand was the primary growth driver, with investment rising by 9.0% and consumer spending increasing by 4.0%.
4. Positive Monsoon Outlook:
Fitch mentions that signs of a more normal monsoon season should support growth and help stabilize inflation. However, the agency also notes that a recent heatwave poses a potential risk to this outlook.
Sectoral Performance and Indicators
The manufacturing sector continues to gain ground, supported by strengthening domestic demand. The Purchasing Managers' Index (PMI) for manufacturing showed continued strength in May 2024, with India's manufacturing PMI being the highest globally. The services sector has maintained its buoyancy, as evidenced by high-frequency indicators. The PMI for services stood strong at 60.2 in May 2024, indicating robust expansion in activity. The eight core industries posted healthy growth in April 2024, further supporting the positive economic outlook.
Inflation Outlook
In May, annual consumer price inflation was 4.7%, a decrease from 5.7% in December 2023. Core inflation has also declined, falling to 3.0% in May from 3.8% in December. Despite these reductions, food price inflation has remained elevated, averaging 7.8% in the first five months of the year. Looking ahead, Fitch anticipates headline inflation to continue its downward trend, projecting it to reach 4.5% by the end of the year. The agency also forecasts average inflation rates of 4.3% for both 2025 and 2026, which is slightly above the Reserve Bank of India's target range midpoint of 4% (±2%).
Monetary Policy Outlook
The Reserve Bank of India has maintained its policy rate at 6.5% and confirmed its hawkish stance of "withdrawal of monetary accommodation." The central bank emphasizes the need to bring down inflation towards the target. Fitch has anticipated a single 25 basis point cut in the RBI's policy rate this year, bringing it to 6.25%. This is a revision from their March projection of 50 basis points of cuts. The agency further expects 25 basis point cuts in both 2025 and 2026.
Long-Term Growth Projections
1. FY 2025-26:
Fitch maintains its earlier projection of 6.5% real GDP growth for this period.
2. FY 2026-27:
The agency forecasts a growth rate of 6.2%, driven primarily by consumer spending and investment.
3. Medium-Term Trend:
Fitch expects growth in later years to slow and approach its medium-term trend estimate.
Global Context
While focusing on India's growth story, Fitch also provides context within the global economic landscape. For 2025, Fitch projects global growth to edge down to 2.4%. In the United States, growth is expected to slow to a below-trend rate of 1.5%, while in the eurozone, growth is anticipated to pick up to 1.5%. In China, Fitch expects growth to fall to 4.5% next year as exports and government spending decelerate.
Conclusion
Fitch Ratings' upward revision of India's GDP growth forecast for FY 2024-25 to 7.2% reflects a positive outlook for the Indian economy. This projection, aligned with the RBI's estimate, is underpinned by expectations of robust consumer spending, continued investment growth, and strong performance across key sectors. While challenges remain, particularly in managing inflation and navigating global economic headwinds, India's economic trajectory appears promising. As the country moves forward, sustaining this growth momentum while addressing structural challenges will be crucial for long-term economic stability and prosperity.
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