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OECD revises India growth forecast for FY25 to 6.6%

The Paris-based body’s growth forecast is 40 bps higher than its earlier forecast of 6.2% in February

OECD revises India growth forecast for FY25 to 6.6%
[Source photo: Chetan Jha/Press Insider]

The Indian economy will grow at 6.6% in the current fiscal year and the next, the Organisation for Economic Cooperation and Development (OECD) said in its latest Economic Outlook.

Public gross capital formation will drive domestic demand, while exports, especially of services such as information technology and consulting, will continue to grow, OECD said, adding that headline inflation will decline gradually, although uncertainty about food inflation remains elevated.

OECD’s growth forecast for the current fiscal is 40 basis points higher than its earlier forecast of 6.2% in February. One basis point is one-hundredth of a percentage point.

India’s gross domestic product (GDP) growth for the just-concluded fiscal 2024 is projected at 7.8%, the Paris-based body said.

The Reserve Bank of India (RBI) is likely to begin monetary policy easing in the second half of the year once lower inflation is maintained. The 2024 interim Union Budget aims for consolidation, setting a fiscal deficit target at 5.1% of GDP for fiscal 2025, it added.

Fiscal support should remain targeted at vulnerable households, while rising debt limits fiscal space and increases the need to tackle structural problems in order to make growth fairer and more sustainable, OECD said.

“Returns from reforms could be significant in agriculture, which accounts for the largest share of employment and, due to low productivity and still widespread poverty, absorbs considerable public subsidies,” it added.

Growth was stronger than expected in the second half of fiscal 2024, driven by strong public investment in transport and energy infrastructure, as well as exports of services.

Private consumption, meanwhile, has been less vigorous, confirming the preliminary findings from a new household consumption expenditure survey. Some high-frequency indicators, including on E-way bills, toll collections, and new vehicle and scooter sales are suggesting increasing activity.

Other indicators, such as digital payment transactions and cement output, remain relatively flat. In urban areas, conditions on the labor market have become more favorable for job seekers, but in rural areas demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act has lost steam, although it remains at high levels.

The tighter monetary policy stance and tight liquidity have helped to anchor inflation expectations, despite recurrent supply-side shocks.

Headline inflation eased to 4.9% in March 2024, helped by lower import price growth and softer input prices, and core inflation stood at 3.2%.

The stock exchange has reached new highs recently, with related capital gains supporting discretionary consumption. The growth of bank credit to industry slowed to 7.8% in January, it added.

On the global economy, OECD sees growth continuing at a modest pace of 3.1% in 2024, the same as the 3.1% in 2023, followed by a slight pick-up to 3.2% in 2025.

The impact of tight monetary conditions continues being felt, particularly in housing and credit markets, but global activity is proving relatively resilient, the decline in inflation continues, and private sector confidence is improving, it said.

“The global economy has proved resilient, inflation has declined within sight of central bank targets, and risks to the outlook are becoming more balanced. We expect steady global growth for 2024 and 2025, though growth is projected to remain below its longer-run average,” OECD Secretary-General Mathias Cormann said.

“Policy action needs to ensure macroeconomic stability and improve medium-term growth prospects. Monetary policy should remain prudent, with scope to lower policy interest rates as inflation declines, fiscal policy needs to address rising pressures to debt sustainability, and policy reforms should boost innovation, investment and opportunities in the labor market particularly for women, young people and older workers,” Cormann added.

“The foundations for future output and productivity growth need to be strengthened by ambitious structural policy reforms to improve human capital and take advantage of technological advances,” OECD chief economist Clare Lombardelli said.

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