India Development Update

India Development Update: September 2024

1. Executive Summary

The global economy remains resilient but weak, with global growth estimated at 2.6% year-over-year (y-o-y) in 2024, significantly below pre-COVID levels. Despite this, several major economies, including the United States and Saudi Arabia, outperformed expectations. Inflationary pressures have eased, and global commodity prices have declined. However, monetary policy remains relatively restrictive, and geopolitical tensions persist.

India continued to be the fastest-growing major economy, with economic growth increasing from 7.0% in FY22/23 to 8.2% y-o-y in FY23/24. This growth was driven by significant expansions in public infrastructure investment and private investment in real estate, supported by a rebound in the manufacturing sector and low input costs. The urban labor market improved, with the urban unemployment rate declining to its lowest levels since Q2 FY17/18, though youth unemployment remained high at 16.5%.

The Reserve Bank of India (RBI) maintained its policy rate, keeping it unchanged at 6.5% after steady declines in headline inflation. Inflation remained within the RBI’s tolerance range, declining from an average of 6.7% in FY22/23 to 5.4% in FY23/24 and moderating to 3.5% in July 2024. Core inflation fell to a record low of 3.0% in May 2024, before picking up slightly to 3.4% in July.

India’s current account deficit narrowed significantly in FY23/24, from 2.0% in the previous fiscal year to 0.7% of GDP. This improvement was driven by a decrease in the merchandise trade deficit, thanks to declining global oil prices and strong export growth, particularly in electronics, iron ore, and pharmaceuticals. Services exports continued to grow robustly. Foreign Portfolio Investment (FPIs) inflows were significant, offsetting a moderation in Foreign Direct Investment (FDI).

The general government fiscal deficit narrowed in FY23/24, despite an increase in capital expenditure. The central government’s fiscal deficit narrowed to 5.6% of GDP, down from 6.4% in the previous year, driven by revenue growth, particularly personal and corporate income taxes. Capital spending by the center surged by 28%, while current expenditure grew by only 1.2% (below nominal GDP growth). The states’ combined fiscal deficit is estimated to have expanded slightly from FY22/23 at 2.9% of GDP, driven by increased capital expenditure. Public debt increased to 83.9% of GDP in FY23/24, from 82.5% in FY22/23, due to the relatively low nominal rate of growth.

2. Outlook

Growth is expected to remain strong at 7.0% in FY24/25, despite a subdued external environment and the dissipation of post-pandemic rebound effects. Geopolitical tensions pose significant external risks, potentially pressuring commodity prices and critical supply chains, and resurgent inflation could keep global interest rates "higher for longer." However, medium-term prospects remain positive, driven by the significant expansion of public investment, which should crowd in corporate investments and a recovery in agriculture. Declining inflation is expected to boost private consumption growth, reducing extreme and moderate poverty.

Fiscal consolidation is expected to continue, helping to lower public debt-to-GDP. The overall fiscal deficit is projected to continue falling, with the budget for FY24/25 targeting a further consolidation of the central fiscal deficit from 5.6% in FY23/24 to 4.9% in FY24/25, driven by a continued reduction of current spending as a share of GDP. Revenue growth is projected to remain robust, thanks to improved tax administration, strong corporate profits, and the higher-than-expected RBI dividend. Growth in capital spending, at both central and state levels, should moderate gradually while remaining high. The debt-to-GDP ratio is projected to decline.