Moody's says India in a sweet spot, raises GDP forecast to 7.2% for 2024

Moody’s Ratings on Thursday raised India's real GDP growth projections for 2024 and 2025, saying a broad-based recovery is underway and is likely to remain resilient.

“We now expect 7.2% real GDP growth in 2024, up from 6.8% previously and 6.6% growth in 2025 versus our earlier estimate of 6.4%,” Moody’s says in the August update of its Global Macro Outlook 2024-25.

The rating agency says these forecast changes assume strong broad-based growth. “We recognise potentially higher forecasts if the cyclical momentum, especially for private consumption, gains more traction,” it says.

The Indian economy is in a sweet spot, with the mix of solid growth and moderating inflation, says Moody’s. Over the medium- and longer-term, India’s growth prospects depend on how well the country can productively tap its substantial pool of labour, says the rating agency.

India's population has a median age of 28 years and around two-thirds of it are of working age. While employment generation and skill development are government priorities, the extent to which India reaps a demographic dividend will depend on whether and how well these policies succeed, it says.

Moody’s says 6%-7% growth should be possible for the Indian economy on the basis of present conditions.

The Indian economy expanded 7.8% year-over-year in the first quarter of 2024 despite the persistence of tight monetary policy and demonstrated progress on fiscal consolidation. Both the industrial and services sectors have recorded strong performances, with the services PMI in particular remaining above 60 since the beginning of the year.

Household consumption is poised to grow as headline inflation eases toward the RBI’s target, says Moody’s. Signs of a revival in rural demand are already emerging, on the back of improving prospects for agricultural output amid above-normal rainfall during the monsoon season, it says.

Non-financial corporate and bank balance sheets are significantly healthier than before the pandemic, and firms are increasingly tapping equity and bond markets to raise capital. The capex cycle should continue to gain steam amid rising capacity utilisation, upbeat business sentiment and the government’s continued thrust on infrastructure spending. Although manufacturing has gained limited traction over the past decade, underlying improvements in the domestic operating environment and broader global trends improve prospects for India's manufacturing sector going forward, it says.

Supporting India's growth dynamics is the rapid and widespread digitalisation of the economy, driven by the government’s investments to build digital public infrastructure, growing telecom and internet penetration and low data usage costs. In particular, broad-based adoption of the United Payments Interface (UPI) — which accounts for nearly 80% of all digital payments and whose transaction volumes have grown tenfold over the past four years — has significantly accelerated financial inclusion and formalisation of the economy.

India’s external position has also strengthened in recent years amid a marked narrowing of its current account deficit. The current account registered a modest surplus in the quarter ending March 2024 — its first in ten quarters — primarily because of robust services exports and strong remittance inflows.

Moody’s says the Reserve Bank of India (RBI) could hold rates till early next year depending on whether the strong growth momentum is sustained.