India’s FY25 economic outlook ‘bright’; CAD will bear watching: FinMin

India, on the whole, looks forward to a "bright" outlook for FY25, and strong growth accompanied by stable inflation and external account and progressive employment outlook will help the Indian economy close the current financial year on a "positive note", according to the Ministry of Finance.

In its latest monthly economic review report for February 2024, the ministry says though there are headwinds like indications of hardening crude oil prices and global supply chain bottlenecks to trade, India's strong economic performance, borne out by recent data releases, stands out even as the global growth shows "sluggish" trend.

India’s economic growth surged to a six-quarter high in Q3FY24, exceeding 8% for the third consecutive time. “The higher second advance estimate for economic growth in FY24 has bolstered the optimism about the economy,” the report says.

The ministry says while robust investment activity is clearly underway, strengthening private consumption demand is evident from indicators like burgeoning air passenger traffic and sale of passenger vehicles, digital payments, improved consumer confidence and expectations of a normal monsoon.

Highlighting the other macro indicators, the report says increased demand for residential properties in tier-2 and tier-3 cities augers well for furthering construction activity. "Non-farm employment has revived, improving the capacity to absorb the labour leaving agriculture. The ascent of manufacturing sector employment is expected to be marked by upscaling of enterprises and sunrise sectors emerging as catalysts for generating quality employment."

On inflation, the ministry thinks the country's inflation outlook for the upcoming months seems "positive". "Core inflation is trending downwards, indicating a broad-based moderation in price pressures. The pick-up in summer sowing is likely to help reduce food prices."

Notably, the retail inflation remained stable and within the target range for the sixth consecutive month in February as it cooled to a four-month low at 5.09% against 5.10% in January. “Driven by strong domestic growth and benign global commodity prices, core inflation is declining continuously,” says the ministry.

On the external front, the current account balance is seen improving as the merchandise trade deficit narrows and the net services receipts rise.

In FY25, however, the current account deficit (CAD) will bear watching, says the ministry. "An increase in domestic household savings will be necessary to finance private sector capital formation in the economy. Improving global investor confidence in India has started reflecting in foreign portfolio investment flows," the ministry adds.

Noticing the announcement by Bloomberg that India would be included in its bond index from January 2025, the ministry says it should bolster inflows, attributing it to the government's "fiscal prudence". "Bond investors will base their investment decisions on their perception of its persistence. India looks positively towards the dawn of FY25."