India’s Growth Prospects: Navigating Challenges Amid Economic Slowdowns

India’s economy is projected to grow at a rate of 6.5% in FY25 and FY26, according to the EY Economy Watch December 2024 report. Despite headwinds from declining private consumption and investment, achieving this growth will require significant government capital expenditure and a strategic investment roadmap to address the domestic and global challenges.

Decline in Investment: A Major Growth Hurdle

The EY report highlights that real GDP growth eased to 5.4% in the July-September quarter of FY25, this marks a 7-quarter low. This decline was attributed to weakening private consumption and gross fixed capital formation, which collectively reduced GDP growth by 1.5 percentage points.

Investment growth, particularly gross fixed capital formation, was at 5.4% in 2QFY25—its lowest in six quarters. Government investment expenditure also contracted significantly, with negative growth of (-) 15.4% in the first half of FY25. Although October 2024 showed slight improvement at (-) 8.4%, cumulative growth for the first seven months remained at (-) 14.7%.

To meet its budgeted capital expenditure growth target of 17.1% for FY25, the report states that the government must achieve a challenging 60.5% growth in the remaining months of the fiscal year.

Long-Term Solutions for Sustained Growth

EY’s report emphasises that accelerating government capital expenditure is crucial for maintaining India’s medium-term growth prospects. A revised National Infrastructure Pipeline (NIP) with updated targets for priority sectors, including smart cities, railways, renewable energy, and roads, is essential to drive investment.

The report also advocates setting specific capital expenditure targets for the central and state governments, public sector undertakings, and private corporations to achieve a combined allocation of at least 6% of GDP annually for infrastructure over the next five years.

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