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  • CRISIL Insights
  • India Economy
December 31, 2024

Indian Economy: Through the looking glass

With ~60 elections held worldwide, capped by the most important one in the United States (US), 2024 has been a year preponderated by politics. It is set to wind up as the hottest on record as well, as per ScienceNews. There was no respite from geopolitical uncertainties either, which continue to simmer in the Middle East and Europe.

Despite the multitude of challenges, the global economy has shown resilience. The US, the biggest economy in the world, is growing at an above-trend rate of 2.7%.

However, as 2025 dawns, policymakers across countries will face new challenges.

Crucially, Donald Trump takes reins of the US in a few weeks and is expected to slap steep tariffs on China as promised during his election campaign. India, which has a trade surplus with the US, will have to monitor developments on this front closely, as it could face similar action. The global climate agenda could lose momentum because of permitting reforms in the US and increased reliance on fossil fuels.

S&P Global forecasts a modest slowdown in the global economy in 2025 and sees the US growing 2.0%. China could slow as well to 4.1% from the 4.8% likely in 2024, if the US raises tariffs on Chinese imports to 25% from the current 14%, as per our assumption. European growth will remain below trend but improve to 1.3% from 0.8%.

India’s economy is projected to decelerate to its trend level this fiscal as well from an above trend rate of 8.2% last fiscal. Lower fiscal stimulus and elevated interest rates, unchanged for the past 21 months, were expected to engineer a moderate cyclical slowdown this fiscal.

But a slower-than-expected growth rate of 5.4% in the second quarter has led to a downward revision in the growth projection. To be sure, the Reserve Bank of India (RBI) has already lowered its growth forecast to 6.6% from 7.2%, with other forecasters following suit. Additionally, adjustments in technical factors, such as net taxes, will narrow the gap between gross domestic product (GDP) and gross value added, which had widened by 100 basis points (bps) last fiscal.

This month’s theme explores the nuances of these technical factors in the aftermath of the pandemic and their impact on GDP. While the slowdown in the second quarter was not sufficient to trigger a rate cut, the RBI did cut the cash reserve ratio by 50 bps to ease liquidity conditions. This can be seen as a step towards easing.

A rate cut in February is a strong possibility, based on expectation that food inflation will cool. In fact, headline inflation slowed to 5.5% in November from 6.2% in the previous month, owing to softening of food inflation. Also, for fiscal 2026, CRISIL has forecast the Indian economy to grow 6.7%, which is still a good pace. On that note, we wish you and your family health and happiness in the year ahead.