Moody's Investors Service on Monday raised India's gross domestic product (GDP) growth forecast to 6.8% for calendar year 2024 from 6.1% projected earlier, driven by strong demand momentum during the election year.

"We believe that with global headwinds fading, the Indian economy should be able to comfortably register 6%-7% real GDP growth and we therefore forecast around 6.8% growth in calendar year 2024, followed by 6.4% in 2025," the credit rating agency says.

Capital spending by the government and strong manufacturing activity have meaningfully contributed to the robust growth outcomes in 2023, according to Moody's. This year's interim budget targets capital expenditure allocation of ₹11.1 lakh crore or 3.4% of GDP in 2024-25 (fiscal year 2025), 16.9% above the 2023-24 estimates. "We expect policy continuity after the general election and continued focus on infrastructure development," says Moody's.

India's real GDP expanded 8.4% year-over-year in the last three months of calendar year 2023, resulting in 7.7% growth for 2023.

The robust growth in GDP was driven by double-digit growth in the manufacturing sector (11.6%), followed by 9.5% growth in the construction sector. The National Statistics Organisation (NSO) has revised GDP growth for Q2 FY24 to 8.1% against the earlier estimate of 7.6%, while that for the first quarter has been revised upward to 8.2% from 7.8%. As a result, the full-year GDP growth estimate has been revised upward to 7.6% from 7.3% projected earlier.

While private industrial capital spending has been slow to pick up, it is expected to pick up with ongoing supply chain diversification benefits and investors' response to the government's Production Linked Incentive (PLI) scheme to boost key targeted manufacturing industries, Moody's says in its Global Macro Outlook 2024-25.

According to the RBI, the total cost of private corporate projects sanctioned by major banks and financial institutions was up 23% during April-December 2023 compared with the same period a year ago, suggesting that the private capex cycle is gaining steam, says Moody's. Additionally, rising capacity utilisation, robust credit growth and upbeat business sentiment point to an improving outlook for private investment, it says.

High-frequency indicators show that the economy's strong Q3 and Q4 momentum carried into the first quarter of this year. "Robust goods and services tax collections, rising auto sales, consumer optimism and double-digit credit growth suggest urban consumption demand remains resilient. On the supply side, expanding manufacturing and services PMIs add to evidence of solid economic momentum," the rating agency says.

Headline inflation in January eased to 5.1% from 5.7% in the month prior. Core inflation also moderated to 3.5%, down from 3.8% in December. The RBI held the repo rate steady at 6.5% in February — the same level since March 2023. "Given the solid growth dynamics and inflation above the 4.0% target, we do not expect policy easing any time soon," says Moody's.

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