ADB raises India's GDP growth forecast for FY25 to 7%; to remain major growth engine in APAC region

New Delhi: The Asian Development Bank (ADB) on Thursday raised India's GDP growth forecast for the current fiscal to 7 per cent, from 6.7 per cent earlier, saying the robust growth will be driven by public and private sector investment and improvement in consumer demand.

In its April edition of the Asian Development Outlook, ADB said India would remain "a major growth engine" in the Asia and Pacific region.

For the 2025-26 fiscal, ADB has projected India's growth at 7.2 per cent.

Growth will be robust despite moderating in FY2024 and FY2025, it said.

The growth estimates for the current fiscal is lower than 7.6 per cent estimated GDP expansion in 2022-23 fiscal. Strong investment drove GDP growth in the 2022-23 fiscal as consumption was muted, ADB said.

The Manila-based multilateral institution in December last year projected the Indian economy to expand by 6.7 per cent in the 2024-25 fiscal.

"The economy grew robustly in fiscal 2023 with strong momentum in manufacturing and services. It will continue to grow rapidly over the forecast horizon. Growth will be driven primarily by robust investment demand and improving consumption demand. Inflation will continue its downward trend in tandem with global trends," said the Asian Development Outlook.

ADB's growth forecast for the current fiscal is in line with the projections made by the Reserve Bank of India (RBI).

The RBI last week had said GDP growth in the current fiscal is projected at 7 per cent on expectations of normal monsoon, moderating inflationary pressures and sustained momentum in manufacturing and services sectors.

The triggers for growth in FY2024 will come from higher capital expenditure on infrastructure development both by central and state governments, rise in private corporate investment, strong service sector performance and improved consumer confidence.

Growth momentum will pick up in FY2025, backed by improved goods exports and an increase in manufacturing productivity and agricultural output, the ADB said.

"Notwithstanding global headwinds, India remains the fastest growing major economy on the strength of its strong domestic demand and supportive policies," said ADB Country Director for India Mio Oka.

The Indian government's efforts to boost infrastructure development, while undertaking fiscal consolidation and providing an enabling business environment will help in increased manufacturing competitiveness to augment exports and drive future growth, Oka said.

ADB said exports are likely to be relatively muted this fiscal, as growth in major advanced economies slows down but will improve in FY2025.

Imports will outgrow exports in 2024-25, driven by strong domestic demand especially for capital goods and intermediate goods.

"Monetary policy is expected to remain supportive of growth as inflation abates, while fiscal policy aims for consolidation but retains support for capital investment. On balance, growth is forecast to slow to seven per cent in FY2024 but improve to 7.2 per cent in FY2025," it said To boost exports in the medium term, India needs greater integration into global value chains, ADB added.

Net exports will continue to subtract from growth in the current fiscal but improve in 2025-26, ADB said, adding in recent years, India's share in global goods exports has remained stable.

A healthy rise of 17 per cent in central government capital expenditure in FY2024 compared to the previous fiscal year together with transfers to state governments will boost infrastructure investment. A new government initiative to support urban housing for middle-income households is expected to further spur housing growth. Private investment is expected to get a boost with stable interest rates.

"With inflation moderating to 4.6 per cent in FY2024 and easing further to 4.5 per cent in FY2025, monetary policy may become less restrictive, which will facilitate rapid offtake of bank credit.

"Demand for financial, real estate and professional services will grow while manufacturing will benefit from muted input cost pressures that will boost industry sentiment. Expectations of a normal monsoon will help boost growth of the agriculture sector," ADB said.

The government's focus on fiscal consolidation, with a targeted deficit of 5.1 per cent of GDP for FY2024 and 4.5 per cent for FY2025, will enable the government to reduce its gross marketing borrowing by 0.9 per cent of GDP in FY2024 and create further room for private sector credit.

India's current account deficit will widen moderately to 1.7 per cent of GDP on rising imports for meeting domestic demand. Foreign direct investment will be affected in the near term due to tight global financial conditions but will pick up in FY2025 with higher industry and infrastructure investment.

Unanticipated global shocks such as supply line disruptions to crude oil markets and weather shocks that impact agriculture output are key risks to India's economic outlook, it said.

The overall health of the banking sector remains robust with the sector continuing to show improved asset quality with gross non-performing assets declining to a 10-year low of 3.2 per cent at the end of September 2023.

Established in 1966, ADB, is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. ADB has 68 member countries, 49 of which are from the Asia and Pacific region.

For developing economies in Asia and the Pacific, ADB forecast GDP to expand by 4.9 per cent on average this year, as the region continues its resilient growth amid robust domestic demand, improving semiconductor exports, and recovering tourism.

"Policy makers should remain vigilant, however, as there are a number of risks. These include supply chain disruptions, uncertainty about US monetary policy, the effects of extreme weather, and further property market weakness in the PRC (People's Republic of China," ADB said.