NEW DELHI :Robust investment activity and strong private consumption demand will drive the Indian economy in FY25 amid sluggish global growth, the finance ministry on Friday said in its economic review for February.
However, challenges such as the impact of the ongoing crisis in the Red Sea and rising crude oil prices loom over the outlook.
“Sustained increases in shipping costs due to disruption can drive up inflation. The crisis is also reverberating in global food prices. Disruptions in grain shipments from the Russian Federation, Ukraine, and Europe pose risks to global food security,” the ministry said.
About 80% of India’s merchandise trade with Europe passes through the Red Sea, with key products such as crude oil, auto and auto ancillaries, chemicals, textiles, and iron & steel seen affected. “The combined impact of higher freight costs, insurance premiums, and longer transit times could make imported goods significantly more expensive,” it added.
The finance ministry said strengthening private consumption demand is evident from indicators like burgeoning air passenger traffic and sale of passenger vehicles, digital payments, and improved consumer confidence.
Meanwhile, the upscaling of enterprises and the emergence of sunrise sectors as catalysts for generating quality employment will mark the ascent of the manufacturing sector, it added.
“Increased demand for residential properties in tier-2 and tier-3 cities augers well for furthering construction activity,” the finance ministry’s latest monthly economic review said.
“Non-farm employment has revived, improving the capacity to absorb the labour leaving agriculture,” it added.
Last December, the Reserve Bank of India (RBI) revised its growth forecast for the Indian economy to 7% for the current fiscal year, up from its earlier projection of 6.5%.
This revision was due to higher-than-anticipated growth in the first two quarters of this financial year.
The union government’s estimate for GDP growth in FY24 stood at 7.6% on the back of better-than-expected growth during the first three quarters.
Interestingly, in a report on 20 March, HSBC Global said Investment in India is being led more by private real estate demand, thus challenging the dominant narrative that public capital expenditure is driving the country’s investments.
“The government is raising capex meaningfully, but PSUs are cutting back, leaving the overall public investment ratio below pre-pandemic levels. Instead, it is private investment that has risen, led by dwellings & structures,” the report had said.
“This chimes well with the rise in house sales and housing loan growth. But the other important component of investment – ‘machinery & equipment’ – remains weak, and it would be premature to call the start of a new investment cycle, at least at this point,” it added.
The finance ministry also said core inflation is trending downwards, indicating a broad-based moderation in price pressures. “The pick-up in summer sowing is likely to help reduce food prices,” the finance ministry’s latest monthly economic review said.
“On the external front, the narrowing merchandise trade deficit and the rising net services receipts are expected to result in an improvement in the current account balance in FY24,” it added.
The latest economic review warned that India’s current account deficit will need to be closely monitored, while an increase in domestic household savings will be necessary to finance private sector capital formation in the economy.
“Improving global investor confidence in India has started reflecting in foreign portfolio investment flows…Bond investors will base their investment decisions based on their perception of its persistence. On the whole, India looks positively towards the dawn of FY25,” it added.
Recently, Bloomberg Index Services said it would include a set of Indian government bonds to its widely-tracked emerging market index from January 2025, a development that could potentially attract investment flows of $3-4 billion beginning next year.
“The announcement by Bloomberg that India would be included in its bond index from January 2025 should bolster inflows, buoyed by the fiscal prudence that the government has demonstrated over the years,” the economic review added.
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Omprakash Tiwary is a business writer who delves into the intricacies of the corporate world. With a focus on finance and economic landscape. He offers readers valuable insights into market trends, entrepreneurship, and economic developments.
