- India’s structural growth story continues to gain traction.
- The economy is on course to become the third largest economy in the world within the next 5 years.
- We take stock of drivers using proprietary indices.
- Timing and quantum of RBI policy committee’s rate cuts will be determined by local realities.
- India continues to distinguish itself with a record-low exchange rate vs. record-high reserves.
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This is a summary of the annual outlook, please download the PDF for the full report.
ECONOMICS (Radhika Rao)
India’s trend growth continues to gain traction, strengthened by catalysts like investments into physical infrastructure, emphasis on improving human capital, streamlining direct subsidy transfers to beneficiaries, productivity gains from digitalisation, widening footprint in high value-added sectors including semiconductors, and expanding presence in global value chains (we discussed this here, here and here). Equity markets have provided corporates with growth capital for investments, besides active participation of banks, private capital, and efforts to deepen the domestic corporate debt market. Bond index inclusion has jumpstarted inflows into the sovereign debt markets, with more global benchmarks set to include IGBs in 2025. Wheels of the structural engine will require to be oiled by keeping the development and reform agenda on track. Quality of growth is also likely to improve as macro balances remain in check alongside a changing trade composition. Lifting employment generation and by extension boosting incomes will be the vital objective for the administration in the rest of its term.
While trend growth stands to improve, there are dents in the cyclical armour. After a strong 8.2% finish in FY24, incoming data across growth drivers is pointing toward near-term moderation. Factors range from sticky inflation eroding real purchasing power and tight financing conditions, as well as idiosyncratic forces. As discussed in the next section, we expect growth FY25 and FY26 to moderate to a more sustainable real growth of 6.0% handle.
CURRENCY (Philip Wee)
At the outset of 2024, the INR started on an upbeat note. Global investors approached India with much optimism, seeking participation in its journey to transform itself into a self-reliant economic powerhouse and a leading influence on the world stage. In January, the Finance Ministry projected that India would become the third largest economy in the world with a GDP of USD5 trillion by 2027. Externally, the markets’ aggressive bets for 7-8 Fed cuts this year buoyed global risk appetite.
Trump will likely take issue with America’s significantly larger trade deficit with India, which accumulated during President Joe Biden’s term. Trump has been vocal about his disapproval of India’s tariffs on American goods, often labelling them as unfair and excessive in restricting US firms’ access to India’s large domestic market.
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