In a recent development, Fitch Ratings has upgraded India’s economic growth forecast for the fiscal year 2024-25 (FY25) from 6.5% to 7%. This revision reflects a robust domestic demand, significant business, and consumer confidence, and favorable economic conditions. The move follows strong economic performance in recent quarters and aligns with other optimistic predictions for India’s economic trajectory.
Strong Economic Performance in Recent Quarters
Fitch’s upgrade comes on the back of India’s impressive economic performance in the third quarter of FY24, where the GDP expanded by 8.4%, marking the fastest growth in 18 months. This growth was primarily driven by substantial contributions from the manufacturing and construction sectors, which have shown resilience and expansion despite global economic challenges.
Domestic Demand and Investment: Key Drivers
The primary driver behind this optimistic forecast is the robust domestic demand, particularly in investments. Fitch emphasizes that high levels of confidence among businesses and consumers are propelling the economy forward. This confidence is critical for sustaining growth, as it encourages increased investment and consumption, which in turn fuels further economic activity.
Inflation and Monetary Policy
Fitch expects inflation to gradually decrease to 4% by the end of 2024, assuming stabilization in food prices. This projection is significant as inflationary pressures have been a concern for policymakers. The Reserve Bank of India (RBI) has maintained a hawkish stance, keeping the repo rate unchanged at 6.5% to manage inflation expectations. However, with the stronger growth outlook, Fitch now predicts a rate cut of 50 basis points in the second half of 2024, revised down from the previous expectation of 75 basis points.
Comparison with Other Forecasts
Fitch’s revised forecast of 7% for FY25 is one of the most optimistic among major financial institutions. The Indian government’s estimate stands slightly lower at 7.6%, while the Reserve Bank of India has hinted at a growth rate close to 8%. This upward revision aligns Fitch with other agencies like Moody’s, which recently revised its forecast for India’s calendar year 2024 growth from 6.1% to 6.8%, citing similar reasons of strong domestic consumption and government expenditure.
Global Context
In the broader global context, Fitch’s upgrade for India stands out, especially when juxtaposed with its downgraded forecast for China, which was reduced from 4.6% to 4.5%. The contrasting outlooks highlight India’s relative resilience and growth potential amidst global economic uncertainties. The improved forecast for India reflects not just internal factors but also the country’s growing prominence in the global economic landscape.
Sectoral Contributions
The manufacturing and construction sectors have been pivotal in driving India’s recent economic growth. The expansion in these sectors underscores the success of government policies aimed at boosting infrastructure development and industrial production. Additionally, the services sector, particularly IT and finance, continues to play a crucial role, benefiting from digitalisation and global demand for Indian services.
Future Outlook
Looking ahead, Fitch anticipates that while the short-term growth will outpace the economy’s estimated potential, there will be a moderation towards a sustainable growth trend by FY25. This balanced outlook is essential for long-term economic stability, ensuring that growth is not just rapid but also sustainable and inclusive.
Conclusion
Fitch’s revised growth forecast for India reflects a positive and robust economic environment driven by strong domestic demand, significant investments, and high business and consumer confidence. This optimistic outlook, coupled with controlled inflation and favorable monetary policies, positions India as a key player in the global economy with promising growth prospects for the coming years.
