In its latest monetary policy review earlier this month, the Reserve Bank of India (RBI) has projected a 7.2% GDP growth for 2024-25 as opposed to its earlier estimate of 7%, with retail inflation trending down to 4.5% from 5.4% averaged last year. 
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The story so far: The National Statistical Office (NSO) has estimated that India’s Gross Domestic Product (GDP) grew 8.2% in 2023-24, outperforming all economic forecasters’ projections. The NSO number even surpassed its own advance estimates that had indicated a 7.6% uptick in GDP last year, imputing a 5.9% rise in the January to March 2024 quarter from 8.4% in the third quarter. However, the fourth quarter is now reckoned to have clocked 7.8% growth, a tad slower than an upgraded 8.6% rise in the previous three months. Private consumption, a key metric that the revival of industrial investments hinges on, remained weak but was slightly better than in the first half of the year.

What are the growth prospects for this year?

In its latest monetary policy review earlier this month, the Reserve Bank of India (RBI) has projected a 7.2% GDP growth for 2024-25 as opposed to its earlier estimate of 7%, with retail inflation trending down to 4.5% from 5.4% averaged last year. Initial indicators for the first two months of this year suggest a sedate start. Industrial output growth slowed to a three-month low of 5% in April, as per data released on June 12. Goods and Services Tax (GST) collections, a proxy for consumption, surged to a fresh high of over ₹2 lakh crore in April, thanks to year-end compliances.

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While collections in May, based on transactions concluded in April, were healthy too, the growth rate slipped to just under 10%, the lowest since July 2021. But some of this slack could be spurred by the heat waves that have hit several parts of the country this summer, economists reckon. A projected above-normal monsoon is expected to help farm output rebound and perk up the rural economy. “We expect GDP growth for 2024-25 to be around 7.3%-7.4%, with the base effect pulling down the growth,” said Bank of Baroda chief economist Madan Sabnavis. Rating agency CRISIL’s estimate is a little lower than the RBI forecast at 6.8%, said its chief economist Dharmakirti Joshi.

Would a coalition govt. affect the economy’s management and reform momentum?

Following the Lok Sabha election verdict, Prime Minister Narendra Modi has returned to office for a third term as the head of a coalition government this time. There is a broad expectation of continuity in government policy, with the Prime Minister retaining top ministers with their portfolios unchanged, including Nirmala Sitharaman and Piyush Goyal at the helm of key economic ministries of finance, and commerce and industry, respectively. “We expect India’s strong medium-term growth outlook to remain intact, underpinned by the government capex drive and improved corporate and bank balance sheets. But upsides to medium-term growth prospects are likely to be more modest if reforms prove more challenging to advance,” said Fitch Ratings director Jeremy Zook.

While “broad policy continuity” is expected in areas such as the thrust on public capex to spur the economy and gradual fiscal consolidation, a BJP-led government that needs “to rely more heavily on its coalition partners” could find it tougher to push contentious reforms, particularly around land and labour, recently flagged as the party’s priorities, he noted. Moody’s Ratings was not as sanguine about fiscal management prospects as Fitch. The NDA’s “relatively slim margin of victory as well as the BJP’s loss of its outright majority in Parliament” may delay more far-reaching economic and fiscal reforms that could impede progress on fiscal consolidation, it said in a note. Moreover, it has cautioned that the near-term economic momentum masks structural weaknesses that pose risks to long-term potential growth, such as “high levels of youth unemployment”, “weakness in productivity growth” in India’s large farm sector that still accounts for 40% of all employment, and the decline in inward foreign direct investment (FDI) flows in each of the past three years.

What should one look for in the full-year Union Budget to be presented next month?

Taking charge of the Finance and Corporate Affairs Ministry this Wednesday, Ms. Sitharaman has said the reforms drive initiated after 2014 with an eye on bolstering India’s macroeconomic stability and growth, shall continue. The ministry will kick off Budget consultations with industry and other stakeholders in the coming week. While Ms. Sitharaman signalled that ‘ease of living’ for citizens will be a key pursuit for the government, industry expects the Budget to address ongoing policy challenges such as reining in inflation, spurring consumption and investments, and untangling knotty taxation issues such as the recently introduced 45-day payment deadline mandate for micro, small and medium enterprises that has inadvertently ended up hurting them.

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With the GST Council expected to meet next week, the Budget may also indicate the Centre’s plans to pursue rationalisation and reforms of the indirect tax regime that completes seven years on July 1. Some elements of the 100-day agenda items drawn up by ministries should also find space in the Budget, along with more concrete details of initiatives announced in the interim Budget presented before the polls. Ms. Sitharaman, who has recently voiced the need for Indian manufacturing to become more sophisticated and be part of global value chains, may also unveil some steps to catalyse this transition, including a reduction in some of India’s high import tariffs. While BJP allies like the Telugu Desam Party (TDP) and the Janata Dal (United) will, of course, expect some measures, or a package, to meet their aspirations for Andhra Pradesh and Bihar, respectively, at a broader level, this administration’s first Budget is expected to outline its agenda for this tenure and offer glimpses of the blueprint to make India a developed nation by 2047 that the Niti Aayog has been drawing up. The last few decades of India’s economic reforms story show that coalitions have also been effective in driving critical and contentious changes, such as the privatisation drive kicked off by the Atal Bihari Vajpayee government. This Budget could reveal if this coalition-dependent government has a fresh and possibly more consensual approach in mind to deliver on India’s reform agenda.