India is on track to attain upper middle-income status by 2031, with the economy expected to double in size to US$7 trillion, according to a report by Crisil. The ratings agency forecasts India's real GDP growth to moderate to 6.8% in the fiscal year 2024-25 (FY25), following a better-than-expected expansion of 7.6% in the current fiscal year.

This slight dip is attributed to factors such as higher interest rates and a reduction in fiscal stimulus, which may dampen domestic demand. However, India is expected to maintain its position as the world's fastest-growing major economy.

Domestic Structural Reforms and Cyclical Levers to Drive Growth

The report, titled "India Outlook," highlights that the country's economic growth will be supported by domestic structural reforms and cyclical levers. Consequently, India can retain, and potentially improve, its growth prospects, positioning itself as the third-largest economy globally by 2031.

Amish Mehta, Managing Director and CEO of Crisil Ltd. emphasized, "India will be the No. 3 economy and an upper-middle income country, which will be a big positive for domestic consumption." He added that the manufacturing sector is well-positioned due to high capacity utilization, opportunities from global supply chain diversification, infrastructure investment focus, green transition priorities, and strong lender balance sheets.

Despite the moderation in growth outlook for FY25, India will remain the fastest-growing major economy. The report cites higher interest rates and lower fiscal impulse as factors that could temper domestic demand in the next fiscal year. However, the nature of government spending is expected to provide support to the investment cycle and rural incomes.

Inflation and Interest Rates Likely to Ease

Crisil foresees a softening of inflation in FY25, driven by healthier agricultural output, benign oil and commodity prices, and slower domestic demand. Moreover, the report suggests that inflation and policy rates have peaked, and rate cuts could begin as early as June 2024.

While near- and medium-term challenges, such as geopolitical uncertainties, global indebtedness, uneven economic recovery, climate change, and technological disruptions, may pose risks, India's growth trajectory is expected to remain robust. The report highlights that continuous reforms, increased global competitiveness, and value chain advancements will enhance the manufacturing sector's contribution to India's GDP beyond the expected 20% by FY31.

Emerging sectors, including electronics, electric vehicles, and energy transition-intensive industries, are growing faster than others and account for 16% of the incremental capital expenditure (capex) in fiscal 2023 and 2024. These sectors are expected to play a crucial role in driving India's economic growth in the coming years.

The Crisil report paints an optimistic picture of India's economic trajectory, with the country poised to become an upper-middle income economy within the next seven years. Earlier this week, Moody's, a rating agency, increased its prediction for India's GDP growth in 2024. They said that both global and domestic confidence in India's economy is high because of strong manufacturing and infrastructure spending.

Moody's had previously thought India's GDP would grow by 6.1% in 2024, but now they believe it will be 6.8% due to better-than-expected data from 2023.

Also, India's statistics ministry has raised its estimate for GDP growth in the fiscal year 2023-24 to 7.6%. This is up from their initial estimate of 7.3%.

The Reserve Bank of India had predicted GDP growth of 7% for the same fiscal year, while the International Monetary Fund had forecasted growth of 6.7%.

Moody's suggests that with fewer global economic challenges, India's economy can grow comfortably between 6.0% to 7.0%. They now expect growth of 6.8% in 2024 and 6.4% in 2025.