OECD Economic Outlook, Volume 2024 Issue 1

India

GDP growth is projected at 7.8% in FY 2023-24 and around 6½ per cent in each of the following two fiscal years. Domestic demand will be driven by gross capital formation, particularly in the public sector, with private consumption growth remaining sluggish. Exports will continue to grow, especially of services such as information technology and consulting where India will continue to increase its global market share, supported by foreign investment. Headline inflation will decline gradually, although uncertainty about food inflation remains elevated.

Monetary policy easing is projected to start in the second half of the year once lower inflation is maintained. The 2024 Interim Union Budget aims for consolidation, setting a fiscal deficit target at 5.1% of GDP for FY 2024‑25. Fiscal support should remain targeted towards vulnerable households. Rising debt limits fiscal space and increases the need to tackle structural problems in order to make growth fairer and more sustainable. Returns from reforms could be significant in agriculture, which accounts for the largest share of employment and, due to low productivity and still widespread poverty, absorbs considerable public subsidies.

Public investment has boosted aggregate demand

Growth was stronger than expected in the second half of FY 2023‑24, driven by strong public investment in transport and energy infrastructure, as well as exports of services. Private real estate demand is also strong. On the other hand, private consumption has been less vigorous, confirming the preliminary findings from a new household consumption expenditure survey. Some high‑frequency indicators, including on E‑way bills, toll collections, and new vehicle and scooter sales are suggesting increasing activity. Other indicators, such as digital payment transactions and cement output, remain relatively flat. In urban areas, conditions on the labour market have become more favourable for job seekers, but in rural areas demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has lost steam, although it remains at high levels. The tighter monetary policy stance and tight liquidity have helped to anchor inflation expectations, despite recurrent supply‑side shocks. Headline inflation eased to 4.9% in March 2024, helped by lower import price growth and softer input prices, and core inflation stood at 3.2%. The stock exchange has reached new highs recently, with related capital gains supporting discretionary consumption. The growth of bank credit to industry slowed to 7.8% in January 2024.

Global near-term developments pose obstacles to higher growth. The terms‑of‑trade tailwinds of recent years will fade, while the Middle East conflict and the threats to Red Sea shipping lanes add risk to India’s trade, contributing to a decline in diesel exports to Europe. Foreign capital flows to Indian stock markets are continuing, including into small- and medium-cap companies. There are signs of growing integration of India into global production networks through trade in intermediary inputs and business services. However, expectations of a major shift to India by global corporations keen to diversify their supply chains away from China, prominently in electronic goods, have yet to materialise.

India: Economic growth indicators

1. Real GDP per capita is based on GDP in constant prices (2015 PPP, USD). Quarterly population data are calculated by interpolating annual data. OECD estimates of population data in 2023.

2. Share of gross value added at basic prices (at 2011-12 constant prices).

Source: OECD Economic Outlook 115 database; OECD Population database; and Ministry of Statistics and Programme Implementation.

Statlink

India: Demand, output and prices

Statlink

India: Inflation and activity indicators

1. OECD seasonal adjustment based on monthly consumer price index and core CPI (index 2012 = 100) from the Ministry of Statistics and Programme Implementation (MOSPI).

2. Yield is measured as the quantity produced per unit area of land used to grow it (tonnes per hectare). The index is calculated for each crop based on the best performing country's yield among emerging G20 countries (Argentina, Brazil, China, India, Indonesia, Mexico, Russia, South Africa and Türkiye), which is set at 100.

Source: CEIC; Our World In Data (2024); and OECD calculations.

Statlink

Monetary policy will start loosening and fiscal consolidation remains a priority

The Reserve Bank of India (RBI) remains committed to the objective of achieving the medium‑term target for CPI inflation of 4% within a band of +/- 2%, while supporting growth. Assuming a normal monsoon season and no other supply shocks that may de-anchor inflation expectations, a first cut of the policy rate is projected in late 2024, with cumulative cuts of up to 125 basis points implemented before March 2026. The RBI will only switch the stance to neutral during 2025.

The FY 2024-25 budget is projected to meet the Interim Budget’s ambitious Union deficit target of 5.1% of GDP, mostly through continuing improvement in tax collection (at largely unchanged rates) and, to a lesser extent, lower outlays for defence and transportation. A full-year budget will be presented after the April‑June general election, providing a detailed statement of the new government’s strategy. Reducing government indebtedness will require a combination of increased revenues, improved spending efficiency and stronger fiscal rules. Renewed consideration should be given to divestiture of government assets, including of public banks and utilities.

A moderate slowdown is expected

In FY 2024-25, India’s GDP growth will slow to 6.6%. Fiscal consolidation, while necessary, will weigh on public investment, and be offset only partially by stronger private investment as business confidence improves. Household consumption (in particular, consumers’ discretionary demand) is not expected to accelerate, amid disappointing job creation, lukewarm rural performance, and still tight financial conditions. Stronger external demand will bring an improvement in export growth. GDP growth will remain in line with the 20-year average in FY 2025-26.

Risks are balanced. On the downside, they include new supply chain disruptions generated by geopolitical turmoil, food inflation stickiness due to extreme weather episodes, and negative spillovers from fluctuations in global financial markets. On the upside, growth may be faster than projected if ongoing disinflation strengthens consumers’ purchasing power, boosting household consumption, business investment and job creation.

Fiscal consolidation should be accompanied by reforms, including in agriculture

India needs to achieve a higher level of real GDP growth to address the country’s multiple development challenges, especially job creation. Fiscal consolidation is appropriate in the current context given the high level of public debt, which holds back private investment. Fiscal consolidation requires a prioritisation of expenditures on infrastructure, including schools and hospitals, climate risk mitigation and digitalisation. Removing market distortions is another key requirement to facilitate resource allocation and foster stronger, more sustainable and inclusive growth, including in agriculture. The sector employs 44% the workforce and accounts for 56% of non-energy CO₂ emissions, but only for around 15% of GDP. Agricultural yields are sub-par and incomes low. Moreover, fertiliser and food subsidies represent a fifth of the overall government budget. To ensure further progress, unpredictable export restraints and tax surcharges should be avoided, subsidies for fertilisers and pesticides reduced, and minimum price supports rationalised (accompanied by a shift to direct payments for non-staple crops). In addition, requirements to sell produce in mandis (state-regulated wholesale markets) should be relaxed. Such bold actions must be accompanied by pro-active communication, open dialogue with stakeholders and regulatory safeguards.