EY projects India’s real GDP growth at 6.5% for FY25 and FY26
The EY Economy Watch also highlights the importance of reforming India’s fiscal responsibility framework to achieve the Viksit Bharat vision by FY2048.
The latest edition of EY Economy Watch suggests that the total debt of the Central and state governments combined should not exceed 60% of the country's nominal GDP, with each taking an equal share of 30%. (Image: Freepik)
The EY Economy Watch December 2024 forecasts India’s real GDP growth at 6.5% for FY25 and FY26.
“Combining the real GDP growth of first two quarters of FY25 at 6.7% and 5.4%, respectively, with RBI’s revised growth estimates for 3Q and 4Q FY25 at 6.8% and 7.2%, respectively, the annual FY25 real GDP growth may be estimated at 6.6%. However, if the turnaround in GoI’s investment expenditure remains subdued, Q3 growth may be 6.5% or less,” says D.K. Srivastava, Chief Policy Advisor, EY India.
With global conditions remaining uncertain and global trade likely to be fragmented, India may have to continue to rely largely on domestic demand and services exports. “In the medium-term, India’s real GDP growth prospects can be kept at 6.5% per year provided the GoI accelerates its capital expenditure growth in the remaining part of the current fiscal year and comes up with a medium-term investment pipeline with participation from the GoI and state governments and both their respective public sector entities, and the private corporate sector,” he adds.
The EY Economy Watch also highlights the importance of reforming India’s fiscal responsibility framework to achieve the Viksit Bharat vision by FY2048. A recalibrated approach is vital for sustainable debt management, eliminating government dissavings, and driving investment-led growth, paving the way for India’s transformation into a developed economy.
The latest edition of EY Economy Watch suggests that the total debt of the Central and state governments combined should not exceed 60% of the country’s nominal GDP, with each taking an equal share of 30%. It also emphasizes the need for both levels of government to balance their current/operating income and spending, which would boost national savings. This would lead to a savings rate of about 36.5% of GDP in real terms. Adding another 2% of GDP from foreign investments would bring the total real investment level to 38.5%, helping India achieve steady economic growth of 7% per year.
Srivastava says, “The proposed revisions to the Fiscal Responsibility and Budget Management (FRBM) Act are essential for enabling India to pursue sustainable growth while maintaining fiscal prudence. The updated framework would help eliminate government dissaving, increase investment, and create a more resilient economy that is well-equipped to meet the challenges of the future. The changes will not only address current challenges but also pave the way for India’s transition to a developed economy, achieving its Viksit Bharat aspirations.”
Revisiting the FRBM Act
Economy Watch suggests that a major reform is required in the FRBM Act to ensure fiscal responsibility while supporting India’s ambitious growth goals. One of the recommendations is to reinstate the revenue account balance as a key target for both the Central and state governments. This would eliminate government dissavings, which are currently a drain on resources, and create space for productive investments that are vital for economic growth.
Symmetrical Fiscal Deficit Targets with Flexibility
The report also suggests that both the Central and state governments should aim for a fiscal deficit target of 3% of GDP each. However, to handle unexpected challenges like economic slowdowns, the Central government should have some flexibility, allowing the deficit to range between 1% and 5% of GDP. In case the crisis is much bigger, such as the Covid crisis, suitable variation in GoI’s and states’ fiscal deficit beyond the above range may be considered by an appropriate body such as a fiscal council. This approach balances fiscal discipline with the ability to address extraordinary situations.
Another key recommendation is to eliminate revenue deficits entirely. This would free up funds for productive investments, with combined government investments expected to reach 6% of GDP by FY2048. Overall, investments in the economy, including contributions from households, businesses, and the public sector, are expected to grow to 38.5% of GDP in real terms, driving sustained growth and development.
