India is set to face multiple challenges in 2025, including geopolitical tensions, inflation management, and the need for private sector investment to sustain its growth trajectory as the world’s fastest-growing major economy.
The September quarter’s growth slump to 5.4%, after averaging 7-8%, was labelled a "temporary blip" by Union Finance Minister Nirmala Sitharaman.
This marks a seven-quarter low, but economists from the Reserve Bank of India (RBI) suggest a recovery in the third quarter of 2024-25, driven by strong festival activities and a rise in rural demand.
The growth-inflation dilemma persists, as the finance ministry and the RBI appear divided on policy. Attention will turn to potential interest rate cuts when the RBI's monetary policy panel meets in February 2025, led by newly appointed Governor Sanjay Malhotra.
This meeting will follow the Union Budget for 2025-26, which will set the economic and fiscal direction of the Modi 3.0 government amid global uncertainties, including geopolitical risks and the upcoming US presidency under Donald Trump.
Despite the recent slowdown, experts remain optimistic about India’s economic prospects. The RBI has projected a real GDP growth of 6.6% for 2024-25, with a rise to 6.9% in the first quarter of 2025-26, and a 7.3% expansion expected in the June quarter of the same fiscal year.
Experts note that global economic policy, particularly from the US, will play a significant role in shaping India’s growth, with volatility in currency and securities markets both domestically and internationally remaining a factor.
Madan Sabnavis, Chief Economist at Bank of Baroda, believes India’s economy will likely surpass 7% growth in 2025, alongside easing inflation, which could boost consumption and private investment in the consumer goods sector. An anticipated interest rate cut, which has been on hold since February 2023, could further stimulate the economy.
Icra’s Chief Economist, Aditi Nayar, highlighted that the domestic outlook is positive, despite global uncertainties such as geopolitics, trade issues, and commodity price fluctuations.
She pointed out that the upcoming 2025-26 Union Budget, revealing the medium-term fiscal path, and the recommendations from the next Finance Commission will be crucial for fiscal policy. However, global uncertainties may constrain private sector capacity additions, particularly in exports.
The government remains committed to fiscal prudence, aiming for a fiscal deficit under 4.5% of GDP by FY2025-26, as part of a broader fiscal consolidation strategy outlined in the FY2021-22 Budget. The Finance Ministry is also focusing on improving the quality of public spending and reinforcing the social security net.
Finance Minister Sitharaman reiterated that the lower-than-expected GDP growth in Q2 was a "temporary blip" and promised a return to healthy growth in subsequent quarters.
The latest RBI report indicates that, despite recent deceleration, the Indian economy remains strong, underpinned by solid macroeconomic fundamentals, robust bank balance sheets, and low financial market volatility.
RBI Governor Malhotra remains optimistic, noting that consumer and business confidence for the year ahead is high, and corporate profitability suggests a brighter investment outlook.
However, the International Monetary Fund cautioned about risks from escalating geopolitical tensions and global economic policy shifts, which could negatively affect global growth projections.
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