The International Monetary Fund (IMF) on Thursday said India’s economic growth is expected to recover from its recent moderation with inflation set to decline. However, the IMF simultaneously apprehended that domestic demand might not see recovery as expected.
“Growth is expected to accelerate in the second half of the fiscal year, supported by a catch-up in government capital spending and continued strengthening of rural demand. Overall, growth for 2024/25 is projected at 6.5 per cent, with the output gap estimated to be broadly closed,” the report prepared on the basis of 2024 Article IV consultation with India said. The report came a day before the official announcement of the growth numbers for the October-December quarter (Q3) of Fiscal Year 2024-25.
Further, the report said that in the next fiscal, robust domestic demand is expected to sustain growth at 6.5 per cent. Over the medium term, growth is projected to continue aligning with its potential at 6.5 per cent. “Inflation is projected to decline to 4.8 per cent and 4.3 per cent in 2024/25 and 2025/26, respectively, broadly converging to the target,” the report said.
Talking about external sector, the report said that the current account deficit is projected to widen to 0.9 per cent of GDP in 2024/25 from 0.7 per cent of GDP in 2023/24 and gradually converge to its norm of 2.2 per cent of GDP in the medium term. Subdued demand in trading partners will contain export growth, with services exports outpacing merchandise trade. The pick-up in domestic consumption and investment will support imports. Net FDI has declined to almost zero, with repatriation and outward investments offsetting steady gross inflows.
Dip in forex reserve
Taking note of the forex reserve dipping to $640 billion in December 2024, the report said that it remained above the end 2023 levels. “Reserves cover is adequate at about 8 months of prospective imports and about 105 per cent of the ARA (Assessing Reserve Adequacy) metric, providing a comfortable cushion against adverse external shocks,” the report said.
Talking about risks to economic outlook, it said that these are titled to downside. “The recovery in private consumption and investment may be weaker than expected if real incomes do not recover sufficiently and execution of public capital expenditure falls significantly below budget targets,” the report said regarding domestic risks.
On external risks, the report said that deepening geo-economic fragmentation—including broader conflicts, inward-oriented policies, and weakened international cooperation—could affect external demand, supply of critical imports, external trade costs, and FDI. Tighter-for-longer financial conditions in the US and a stronger US dollar could affect capital flows.
