India's economic growth has seen a notable increase, averaging over 8% between 2021-2024, compared to 7% from 2003-2019, according to the Reserve Bank of India's (RBI) state of the economy report. This suggests a shift in the trend growth rate post-pandemic, driven by domestic factors. High-frequency indicators suggest that real GDP growth in Q1 of FY25 is maintaining the pace of the previous quarter, write the economists. The report, however, states that these views are those of the authors and do not officially represent the RBI's stance.
In May 2024, the services sector experienced significant growth. The sector expanded by 7.0%, driven by increased activity in financial, real estate, and professional services. This growth was supported by strong credit and deposit growth and better performance from information technology (IT) companies.
The report indicates a significant uptrend in India's growth trajectory, moving from an average of 7% during 2003-2019 to over 8% in 2021-2024.
"More recent indicators suggest that private consumption is resuming its role as the main driver of demand and is getting broad-based to include rural consumers," the RBI report states.
India's real GDP (Gross Domestic Product) growth for FY24 is registered at 8.2%, compared with 7% a year ago, the highest since 2016-17, except for the post-COVID rebound in 2021-22, exceeding all forecasts. Recent data shows private consumption resuming as the main demand driver, becoming more inclusive of rural consumers.
"The higher revised growth is primarily due to an upward revision in the growth of private final consumption expenditure (PFCE) and exports," the central bank adds.
Additionally, a robust revival in private investment is expected to be crucial for future growth, especially as public finances stabilise. "Government consumption saw a modest uptick towards the end of 2023-24, reflecting a sustained focus on capital expenditure, positively influencing medium-term economic prospects and investor sentiment. The contribution of net exports to GDP has improved, with notable gains in the high-end manufacturing sector."
The report also notes a structural change in GDP formation since the pandemic. First quarter GDP has shown some loss of momentum compared to other quarters. Therefore, some slowdown from the 7.8% growth in Q4 2023-24 is expected when the National Statistical Office (NSO) releases its estimates in August.
The report highlights a positive outlook for GDP in 2024-25, with headline inflation showing signs of easing in May 2024, marking the fifth consecutive month of decline. This creates room for aggregate demand to benefit from reduced prices. However, the goal of aligning inflation with targets remains ongoing due to persistent food price pressures.
While headline inflation eased to 4.7% in May 2024, the lowest in the past year, food inflation remained high at 7.9% year-on-year (YoY). Headline inflation is expected to decrease from 5.4% in 2023-24 to 4.5% in 2024-25. This projection considers balanced risks: adverse climate events, rising input costs, and volatility in crude prices and financial markets on one side, and the positive impact of a favourable monsoon on food prices on the other.
