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Big 4: Drivers that will power India's economy
India's FY25 gross domestic product (GDP) growth of 6.5% marked a four-year low, and a sharp drop from the previous year, FY24, when the GDP had grown 9.2%. However, the economy expanded faster than expected at a four-quarter high of 7.4% in the March quarter from a year earlier, belied concerns over risks emerging from higher US tariffs and geopolitical situation.
India remains the world's fastest-growing major economy, and is set to become the world's fourth-largest by the end of 2025, as per the International Monetary Fund's (IMF) World Economic Outlook (WEO) report released in April.
Key risks to India's economic growth include tepid urban consumer demand, muted private investment and a volatile global environment. The Reserve Bank of India's rate-setting Monetary Policy Committee has retained India's GDP forecast for FY2025-26 at 6.5% amid economic
by Taboola
by Taboola
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Even though the expected trade deal with the US can boost India's external sector, uncertainty might persist over global trade tensions. The drivers for India's economic growth this year are likely to be
government spending
, low interest rates, rural strength and hopefully a revival of consumer demand due to various factors.
Government spending
Even as private firms delayed investments amid global uncertainties, India's economic growth picked up pace in the January-March quarter, buoyed by higher government spending besides other factors. Going forward, government spending will likely continue to boost the GDP growth.
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The central government has extra space in the fiscal deficit to push up expenditure by at least Rs. 0.8 trillion during the ongoing FY26 relative to the Budget Estimates (BE), as the higher GDP and RBI dividend payout provide room for it, according to a report by ICRA. The report said that the government could raise expenditure by Rs. 0.8 trillion in FY26. If the full amount is used for capex, the total capex would rise to Rs. 12.0 trillion from the budgeted Rs 11.2 trillion, raising its growth to 14.2 per cent, compared to 6.6 per cent currently.
India's corporate capex is likely to remain tentative amid heightened uncertainty created by US tariffs and the uncertainty on urban consumption outlook.
Rural consumption
Rural consumption
is poised to remain a bright spot in the
Indian economy
, supporting growth in the ongoing fiscal year, economists said after fourth-quarter GDP growth beat estimates.
"High frequency data indicates rural demand is faring better even as urban demand is patchy," A. Prasanna, head of research at ICICI Securities Primary Dealership, told Reuters. "Given rural consumption is a bigger part of overall consumption pie compared to urban consumption and was generally hurting from Covid shock in last few years, it is likely consumption growth will stay resilient." Above-average monsoon rains this year and the resultant rise in farm incomes are likely to boost rural demand as will easing inflation, economists said.
Tractor and two-wheeler sales, the bellwether of demand in rural India, have been rising in recent quarters while sales of fast-moving
consumer goods
have been robust. Rural wage growth, adjusted for inflation, is at its highest in four years, data from ICICI Securities Primary Dealership showed, with demand for jobs under a rural jobs scheme has fallen in recent months, as per a recent JP Morgan report.
Low interest rates
Last week, the RBI underscored boosting growth as its urgent policy priority, surprising the markets with both a frontloaded and outsized half-a-percentage point rate cut and a simultaneous reduction in the cash reserve ratio (CRR) to inject durable liquidity into the lending markets.
Larger-than-anticipated repo rate cut by 50 bps to 5.5% from the earlier 6%, marking the third reduction since February, will serve two purposes. One, it gives the economy an early start to revive borrowing and investment. Two, it signals that the battle with inflation is done for now and RBI could tease out some more cuts. MPC has essentially created the setting for growth to revive through its cumulative one percentage point interest rate cut since the beginning of the year. Such resolute action should, as governor Sanjay Malhotra hopes, calm nerves in an uncertain economic environment of trade wars and geopolitical tension.
RBI Governor Sanjay Malhotra said, 'I must also add that while price stability is a necessary condition, it is not sufficient to ensure growth.' He added, 'A supportive policy environment is vital. This is even more important during periods of high uncertainties such as the current times.'
The RBI is expected to hold interest rates in August but possibly make yet another reduction later this year, following its greater-than-expected cut on Friday aimed at bolstering growth. A poll by ET showed that eight out of 10 institutions expect a rate cut either in October or December while two do not expect any reduction until December.
Consumer demand
While rural demand has strengthened, urban demand still stays weak but that is likely to change. A big income tax relief in the Union budget for people at the bottom of the tax pyramid, softening inflation and lower interest rates are expected to boost overall consumer demand.
Julius Baer Group expects the domestic consumption to recover. 'The biggest theme going forward will be a revival in consumption in India,' Nitin Raheja, head of discretionary equities at Julius Baer India, said in an interview. Lower- and middle-income segments will lead the pickup in India's consumer spending, aided by slowing inflation, abundant monsoon rains and income-tax cuts, said Raheja, who oversees portfolio management services and alternative investment funds for the Zurich-based wealth manager in India. There was a K-shaped recovery in India after the Covid-19 pandemic, and the bottom part which suffered the most will likely now see a revival, he added.
'Private consumption, the mainstay of aggregate demand, remains healthy, with a gradual rise in discretionary spending,' RBI Governor Sanjay Malhotra said on Friday. 'Rural demand remains steady, while urban demand is improving.'
