Mixed outlook
The Indian economy, often hailed as a resilient force among emerging markets, has begun 2025 with a mix of optimism and caution. Growth slowed to 6 per cent in the first half of FY 2024-25, but the Reserve Bank of India (RBI) now expects a recovery in the second half, forecasting an annual growth rate of 6.6 per cent. While this may reflect stability to some, sustaining long-term momentum will require addressing significant challenges on the horizon. RBI Governor Sanjay Malhotra’s first Financial Stability Report highlighted the health of India’s financial system. Declining non-performing assets, strong bank profitability, and solid capital reserves lie at the heart of the system’s ability to withstand shocks. Stress tests confirm that banks and non-banking financial companies (NBFCs) are well-prepared for adverse scenarios. In case the need arises, this could reinforce the confidence in the financial sector.
India, as is well known, has been braving myriad global uncertainties, including geopolitical tensions and fluctuating commodity prices, with relative strength and composure for quite a long time now. Indicators like rural consumption revival, strong services exports, and government-driven infrastructure spending continue to serve as markers of optimism. However, vulnerabilities remain in multiple sectors. India’s GDP growth slowed to 5.4 per cent in Q2 of FY2024, which also happened to be the lowest in seven quarters, primarily due to weak private investment and uneven industrial recovery. Though inflation has eased—credit to a strong Kharif harvest—risks from extreme weather and volatile supply chains continue to linger.
In order to counter these challenges, the government appears focused on public spending and infrastructure development. Investing in agricultural resilience, boosting manufacturing, and promoting green technologies will be essential to mitigating external shocks and sustaining growth. As inflation continues to moderate, calls for a policy rate cut to lower borrowing costs and stimulate private investment are growing louder, though there is not much clarity on this front yet. Sectoral performance also offers a mixed picture. Agriculture holds promise with a strong Rabi crop and rising rural demand, but extreme climate risks continue to be a pestering threat. The services sector, led by IT and digital industries, continues to thrive, but staying competitive for them will require investment in workforce skills and innovation. Manufacturing, duly supported by government incentives and infrastructure upgrades, can drive growth if bottlenecks in logistics and energy sectors are addressed in a timely manner.
It may also be reiterated that India’s economic outlook is tied to global developments, such as US monetary policy shifts and geopolitical tensions. Domestically, fiscal challenges, rising debt, and uneven asset valuations demand strict attention. The government’s plan to reduce the fiscal deficit below 4.5 per cent of GDP by FY 2025-26 seeks to strike a much-needed balance between growth ambitions and fiscal prudence. Prioritising spending on education, healthcare, and social security will be crucial for inclusive development in this tightrope walk.
With growth projected between 6.5 per cent and 7.0 per cent, India remains the fastest-growing major economy. However, translating this potential into sustained progress will require bridging investment gaps, tackling structural inefficiencies, and navigating global uncertainties. As the Union Budget 2025-26 approaches, decisions on fiscal priorities will shape the path forward. To sum up, India’s growth story in 2025 depends on its ability to maintain financial stability, attract investments, and harness its demographic and technological strengths. Success in these areas will determine whether the country can fulfill its ambitions in an era characterised by both challenges and opportunities.
