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The Asian Development Bank (ADB) has maintained its growth forecast for India's economy, expecting it to grow at 7% in FY25 and 7.2% in FY26. This projection, part of ADB's 'Asian Development Outlook (ADO) September 2024', comes amidst a global backdrop of geopolitical challenges and economic uncertainties.
Despite the global headwinds, India's economy has shown resilience and is poised for steady growth, according to ADB. The bank attributes this to a strong agricultural sector, driven by an above-average monsoon, which will lead to enhanced rural spending. Additionally, the industry and services sectors are expected to maintain robust performance, contributing to overall economic expansion.
ADB's optimistic outlook for India is further bolstered by positive projections for private investment and urban consumption in FY25 and FY26. A new government policy aimed at providing employment-linked incentives to workers and companies is expected to further stimulate job creation starting in FY26. Fiscal consolidation efforts are also projected to lead to a reduction in central government debt and a decline in the general government deficit.
However, ADB also anticipates a rise in India's consumer inflation to 4.7% in FY25 due to elevated food prices, despite expectations of higher agricultural output. This rise in inflation could prevent the Reserve Bank of India (RBI) from adopting a more accommodative monetary policy, which could otherwise lead to increased credit expansion.
Despite the projected rise in inflation, ADB remains hopeful that the situation may improve. If improved agricultural supply leads to moderating food price increases, the RBI may begin lowering policy rates in FY25, which would create more favorable conditions for credit expansion. The bank's forecast also anticipates that India's current account deficit will improve due to better exports, lower imports, and strong remittance inflows.
The ADB acknowledges potential risks to its optimistic outlook, including geopolitical shocks that could disrupt global supply chains and commodity prices, as well as weather-related risks to agricultural output. The achievement of the central government's capital expenditure target in FY25 is also crucial for maintaining the projected growth trajectory.
India's retail inflation has shown some signs of stabilization, reaching 3.65% in August. While food prices remain a concern, inflation has remained within 2 percentage points of the Reserve Bank of India's medium-term target of 4%.
Despite potential risks, ADB remains optimistic about India's economic prospects, highlighting the potential for increased foreign direct investment to support growth and investment, particularly in manufacturing. Improvements in agricultural supply could also lead to lower food prices, potentially mitigating inflationary pressures and driving further economic growth.
Source: ADB retains FY25 growth forecast for India’s economy at 7%