NEW DELHI: Optimistic GDP growth projections for FY25 depend on strong government investment and effective inflation control for India to reach over 7 per cent growth, according to Ernst & Young (EY) report.

Recent reports indicate a mixed outlook, with the Reserve Bank of India (RBI) maintaining a cautious stance on monetary policy amid rising inflation.

In September 2024, the Consumer Price Index (CPI) inflation was recorded at 5.5 per cent, pushing the average inflation for the second quarter of FY24 to 4.2 per cent, slightly above the RBI's expected target of 4.1 per cent.

Projections for the third quarter suggest CPI inflation could rise to 4.8 per cent, potentially delaying any interest rate reductions by the RBI, especially as inflation continues to exceed the desired mean target.

During its October monetary policy review, the RBI decided to retain the repo rate at 6.5 per cent, in light of the global trend toward rate cuts, including a 50 basis point reduction by the U.S. Federal Reserve in September.

Despite this, the RBI remains optimistic about India's real GDP growth for FY25, forecasting a rate of 7.2 per cent, driven by anticipated strong private consumption and investment growth. However, a significant downside risk looms, particularly due to a 19.5 per cent contraction in government investment spending, which is critical to sustaining economic momentum.

For the remainder of the fiscal year, robust performance in personal income tax revenue growing at 25.5 per cent contrasts sharply with the negative growth of corporate income tax revenues at -6.0 per cent. This highlights the challenge of meeting the government's budgeted growth targets, especially as capital expenditure also faces a steep decline.

Recent high-frequency economic data indicates a moderation in growth momentum. Manufacturing Purchasing Managers' Index (PMI) fell to 56.5 in September, while services PMI dipped below 60 for the first time since January 2024, signaling a slowdown in output and new orders. Additionally, the Index of Industrial Production (IIP) contracted for the first time since October 2022, reflecting broader economic challenges.

The International Monetary Fund (IMF) has projected a moderation of India's GDP growth from 8.2 per cent in FY24 to 7 per cent in FY25, and further to 6.5 per cent in FY26, attributing this slowdown to the exhaustion of pent-up demand from the pandemic.

Maintaining the growth momentum will require accelerated government investment to avoid crowding out private sector initiatives.