NewDelhi: India has recently experienced steady economic growth with rates higher than 7% some years consecutively witnessed in the preceding years. However, as the current financial year continues, apprehensions are increasing about the kind of growth being witnessed. Supranational bodies like the IMF, World Bank, and many rating agencies have kept their forecast for India’s growth rate at 7% or beyond. However, there is always a question mark on whether any of these forecasts is achievable.
Among the causes of this uncertainty, the inflation rate is high while government expenditure is gradually declining. According to a report from Ernst & Young (EY), maintaining a GDP growth rate of 7% or above in the fiscal year 2025 will depend heavily on two key elements: with persistent governmental expenditures and well-coordinated inflation regulation.
The EY report goes on to capture the idea that the projections for India remain somewhat mixed. On current inflation detail, hearing that the ‘CPI Inflation September, 2024’ was 5.5 % and A ‘Q2Average Inflation FIY 2024’ was 4.2% a little above the RBI’s targeted 4.1% . If realised in the third quarter, CPI inflation is predicted to rise further to 4.8% which can push the time for interest rate-cut by the RBI further in to the future as inflation remain above the targeted level.
In its latest monetary policy review announced in October the RBI has once again refrained from changing the repo rate and has left it unchanged for the tenth time in a row. On the other hand, the US Federal Reserve had in recent past cut its interest rate by half a percentage point in September. However, according to the RBI, improving its outlook for India’s real GDP for FY:25 to 7.2% on account of higher projections for private consumption and investment.
Of all the observations made in the current report, one would agree that government investment has significantly reduced and is currently at a 19.5%. Any such expenditure has in the past fulfilled the important function of stimulating economic activities. On a more positive note, collection of personal income tax is increasing by 25.5 percent in the remaining days of the fiscal year while corporate income tax, which is a pipeline for government revenue, has declined by 6 percent – a major challenge to the government and had caused proactive cuts in capital expenditure.
The new data of economic activity has revealed some signs of exporters’ poor growth performance; the manufacturing PMI losing 0.5 points and being 56.5 in September, and the services PMI reading below 60 for the first time since January 2024 suggesting that production and new orders have slowed. Also, the index of industrial production or IIP for the first time is on the decline since October 2022 indicating a set back in the economic tidal. Again the IMF forecasted growth rate of India at 7 % during the current fiscal year reducing from 8.2% in the previous year and growth is expected at 6.5 % in FY 2026 due to demand deficit.
However, as the environment changes, the issues whether India can sustain such amazingly high growth rate while facing inflationary pressures and decline in government expenditure become critical.
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