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India’s economy is expected to remain robust over the next two years even though headline growth in the country’s Gross Domestic Product (GDP) is forecast to slow from 7.6% in 2023-24 to 7% this year before improving to 7.2% in 2025-26, the Asian Development Bank (ADB) said.

In its Asia Development Outlook report released on April 11, the Bank said it expects retail inflation to ease to 4.6% this year and 4.5% in 2025-26. India’s ‘persistent’ food inflation is expected to drop to 5.7% as farm output returns to trend this year.

A projected normal monsoon this year will also help revive rural consumption. Rural consumption was muted last year due to erratic rainfall affecting the farm sector, with greater demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act signalling the resultant stress.

“In India, growth is forecast to remain strong as rising consumption complements continued investment growth,” said Abdul Abiad, director of ADB’s macroeconomics research division. As India accounts for 80% of South Asia’s GDP, it is still the fastest-growing sub-region with improving domestic demand as prices moderate in most economies, he noted. South Asia is expected to grow 6.3% this year and 6.6% in 2025.

Higher incomes will spur consumer demand and confidence levels in urban consumers has improved, so demand is expected to rise from those areas with falling inflation and a gradual improvement in cities’ labour markets, the ADB reckoned. However, a rise in imports to meet domestic demand could widen the Current Account Deficit moderately to 1.7% of GDP this year and next year, it said.

India’s growth, the report said, will be driven by public and private sector investment demand and by gradual improvement in consumer demand as the rural economy improves. While exports are likely to be relatively muted this year as growth in major advanced economies slows down, they will improve in 2025-26.

“Foreign direct investment inflow will likely remain muted in the near term due to tight global financial conditions but will pick up in 2025-26 with higher industry and infrastructure investment,” the report averred.

India’s growth, the report said, will be driven by public and private sector investment demand and by gradual improvement in consumer demand as the rural economy improves. While exports are likely to be relatively muted this year as growth in major advanced economies slows down, they will improve in 2025-26.

Stressing that India’s economic outlook depends on price and financial market stability that are crucial for consumer and business confidence, the ADB said its projections face a downside risk from global shocks such as a spike in crude oil and energy prices leading to higher global inflation and tighter financial conditions.

“On the domestic side, there is a risk of underperformance in agriculture due to weather shocks that can affect demand and inflation,” it noted.

Among upside risks to its forecast, the Bank said, was faster-than-expected FDI inflow, particularly into manufacturing, which would improve output as well as productivity. “Better-than-expected global growth could boost exports and thus growth,” the ADB added.