India’s economy is expected to grow at 6.5 pc in the fiscal year 2025-26, according to the latest EY Economy Watch report.
The report highlights the need for a carefully planned fiscal strategy that supports human capital development while ensuring fiscal stability to maintain long-term economic growth.
For FY25, real GDP growth is projected at 6.4 pc, aligning with the revised estimates from the National Statistical Office (NSO).
The revised national accounts data indicate that India’s real GDP growth rates for FY23, FY24, and FY25 stand at 7.6 pc, 9.2 pc, and 6.5 pc, respectively.
The third-quarter growth rate for FY25 is estimated at 6.2 pc, implying that the economy would need to expand by 7.6 pc in the fourth quarter to meet the annual projection.
The report notes that achieving a 7.6 pc growth rate in the final quarter would require private final consumption expenditure to grow at 9.9 pc.
Given that such high consumption growth has not been observed in recent years, an alternative strategy would be to boost investment spending, with government capital expenditure playing a crucial role in driving economic momentum.
Investments in Human Capital Essential for Growth
As India’s population continues to grow, alongside shifts in its economic structure, investments in education and healthcare will be critical to sustaining long-term growth and improving human capital outcomes.
The EY report suggests that over the next two decades, India may need to significantly increase public spending in these sectors to match levels seen in high-income countries.
Government expenditure on education may need to rise to 6.5 pc of GDP by FY2048, up from the current 4.6 pc, to meet the workforce demands of India’s young and expanding population.
Similarly, public healthcare expenditure would need to increase from 1.1 pc of GDP in 2021 to 3.8 pc by FY2048 to improve healthcare access and overall health outcomes.
Addressing Regional Disparities Through Fiscal Reforms
The report highlights that low-income states with younger populations will require additional financial support to meet growing demands for education and healthcare.
To bridge these regional disparities, equalisation transfers could be an effective mechanism, ensuring that states with lower fiscal capacity receive adequate resources for social sector investments.
A phased fiscal restructuring approach is recommended to achieve these spending targets without compromising economic growth.
The report suggests that increasing India’s revenue-to-GDP ratio from the current 21 pc to around 29 pc over time would help generate the necessary financial resources while maintaining fiscal discipline.
India’s Demographic Dividend and the Need for Fiscal Reform
DK Srivastava, Chief Policy Advisor at EY India, stated that India’s shifting demographic structure is expected to increase the proportion of working-age individuals in the total population.
If properly harnessed, this demographic dividend could create a cycle of sustained economic growth, employment generation, increased savings, and higher investment levels.
“To achieve this potential, India must raise its revenue-to-GDP ratio and gradually increase government spending on key areas such as health, education, and infrastructure,” Srivastava said.
He also stressed the importance of fiscal measures to ensure equitable growth across states and reduce inter-state disparities in access to essential services.
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