India’s economy is forecast to grow 6.5 per cent in the current and next financial years, despite headwinds from slowing private consumption and investment, an EY report said.

Government capital formation has contracted sharply in the first half of the fiscal and needs to ramped up to meet 6.5 per cent growth, the report warned.

Real GDP growth eased to a seven-quarter low of 5.4 per cent in July-September — the second quarter of the current 2024-25 fiscal year, against 6.7 per cent in the preceding quarter.

This was primarily because two domestic demand components — private final consumption expenditure and gross fixed capital formation — together accounted for a fall of 1.5 percentage points.

“One outstanding feature of demand is the slowdown in investment, as reflected in the growth of gross fixed capital formation. This growth is estimated at 5.4 per cent in 2QFY25, which is a six-quarter low. Apart from the fact that private investment demand has not picked up, there was a contraction in government of India’s investment expenditure growth, which has remained negative at (-)15.4 per cent in first half of FY25,” the report said.

It continued to be negative even in October 2024 at (-) 8.4 per cent, implying that in the first seven months government’s investment expenditure growth has remained negative at (-) 14.7 per cent.

“In fact, to meet the budgeted target of Government of India’s capital expenditure growth of 17.1 per cent over CGA actuals for FY24, we now require a growth of 60.5 per cent in the remaining five months of the fiscal year FY25.”

The EY Economy Watch December 2024 forecasts India’s real GDP growth at 6.5 per cent for FY25 (April 2024 to March 2024 fiscal year) and FY26.

“With global conditions remaining uncertain and global trade likely to be fragmented, India may have to continue to rely largely on domestic demand and services exports,” the report said.

“In the medium-term, India’s real GDP growth prospects can be kept at 6.5 per cent per year provided the Government of India (GoI) accelerates its capital expenditure growth in the remaining part of the current fiscal year and comes up with a medium-term investment pipeline with participation from the GoI and state governments and both their respective public sector entities, and the private corporate sector.”

“To maintain this trajectory, it is essential to recast the 2019 National Infrastructure Pipeline (NIP) with revised targets for priority sectors, including roads, railways, smart cities, renewable energy and power,” the report stated.

It proposed setting investment targets for the central and state governments and their public sector undertakings, as well as private corporations, to achieve a combined capital expenditure allocation of at least 6 per cent of GDP annually for infrastructure over the next five years.

The report calls for major reforms to India’s Fiscal Responsibility and Budget Management (FRBM) Act to align fiscal policy with the country’s ambitious growth goals. It recommends eliminating revenue deficits entirely to free up resources for productive investments.

“Both the central and state governments should target fiscal deficits of 3 per cent of GDP each, with flexibility for the central government to range between 1 per cent and 5 per cent of GDP during economic slowdowns or crises,” said D.K. Srivastava, Chief Policy Advisor, EY India.

In exceptional situations, such as the Covid-19 pandemic, fiscal deficits could exceed this range, subject to approval by an appropriate body.