Even as the economic growth momentum looks strong in an otherwise gloomy global outlook, Tanvee Gupta Jain, Chief India Economist, UBS, chalked out five key questions that the Indian economy needs to address.

While India’s economic growth slowed to a five-quarter low of 6.7 per cent in the first quarter of FY25 from 7.8 per cent in the preceding March quarter, the Asian Development Bank (ADB) retained its projection on India’s GDP growth for the current financial year at 7 per cent and for 2025-26 at 7.2 per cent. “India’s economy has shown remarkable resilience in the face of global geopolitical challenges and is poised for steady growth,” said Mio Oka, ADB Country Director for India. Earlier, Chief Economic Advisor (CEA) to the Union government, V Anantha Nageswaran had also stated that the Indian economy is expected to grow at a rate of 6.5-7 per cent in the current financial year on a steady state basis. “The Indian economy is poised to remain the fastest growing in the current financial year with a growth rate of 6.5-7 per cent on a steady state basis. This is a very good achievement in the current global context,” V Anantha Nageswaran had said.

With the Reserve Bank of India’s (RBI) monetary policy committee all set to take rate action after its October meeting, S&P Global ratings and many other brokerage firms have predicted two rate cuts by the central bank by the current financial year. Earlier, the US Federal Reserve had kicked off its easing cycle with a surprising 50 bps cut, and the European Central Bank (ECB) lowered its deposit rate by 25 basis points to 3.50 per cent.

Even as the economic growth momentum looks strong in an otherwise gloomy global outlook, Tanvee Gupta Jain, Chief India Economist, UBS, chalked out five key questions that the Indian economy needs to address…

India’s K-shaped consumption pattern 

India’s household consumption is expected to recover from 4 per cent YoY in FY24 to 6 per cent YoY in FY25, but will remain below trend (6.5-7 per cent). Per analysis by UBS, the K-shaped consumption pattern could narrow in FY25E, as the premium or affluent segment of consumption is now showing signs of fatigue, while low-income segment consumption could pick-up on a cyclical recovery in rural demand, higher public capex, an increase in social welfare spending and stimulus by state governments.

India’s growth: peak ‘goldilocks’? 

The Indian economy has been in a ‘goldilocks’ phase since FY22 with strong growth and manageable macro stability risks. “We maintain our baseline view that India’s GDP growth will stabilise towards a trend at 6.8 per cent YoY in FY25E, supported by political and policy continuity and the recent softening of global oil prices as a tailwind. Among emerging markets, we continue to expect India to remain one of the fastest growing major economies in 2024-26E.   However, we think India is not immune to external risks including a global growth slowdown and   China’s excess capacity being offloaded on the domestic market,” said Tanvee Gupta Jain.

UBS also talked about a mix of tailwinds and headwinds at play, and these include lowe crude oil prices which tend to have a favourable impact on  macro stability; greater-than-expected slowdown in credit growth by banks and non-bank financial companies (NBFCs); risk of China’s excess capacity getting offloaded which could further delay private capex recovery; and global growth uncertainty that continues to pose downside risks.

Is shifting composition of household savings affecting bank deposit growth? 

Since the pandemic, household borrowings have risen with easier access to retail loans and a younger population and there has been a  noticeable shift in the composition of households savings from bank deposits to other asset classes, like property, equites, provident & pension funds, small savings, etc. in search for higher returns. This, the UBS report said, led to bank credit growth (15 per cent YoY, as of August 2024) consistently outpacing deposit growth (11 per cent YoY), leading to a higher reliance among banks on short-term non-retail deposits to meet incremental credit needs. While UBS’s India Bank team expects bank credit growth to soften to 12-13 per cent YoY by end-March 2025E, UBS said, the bank deposit rates could stay elevated despite expected policy easing, leading to asymmetric monetary transmission.

Can global monetary easing lead to more than expected rate cuts by the RBI? 

Real interest rates have moved higher, as inflation has begun to moderate. This has raised questions over whether India is following a restrictive monetary policy that is holding back a much-needed capex cycle recovery. “Given the domestic inflation outlook is improving (likely to be 30bps lower than RBI’s forecast of 4.5 per cent for FY25) and the global monetary easing cycle has begun, we now expect MPC to lower repo rates by 75bp in this cycle (prior forecast: 50bps ). That said, the timing of India’s rate cut cycle will be dependent on domestic growth-inflation dynamics. In our base case, we expect an easing cycle to start from December policy,” said Tanvee Gupta Jain.

UBS further stated that the likely softening in food inflation on strong monsoons, good crop sowing and lower international commodity prices has opened up space for a shallow easing cycle to commence in India later this year. Per the report, the headline CPI inflation is expected to undershoot RBI’s forecast of 4.5 per cent by at least 20-30 bps.

Is the recent fiscal profligacy by various Indian states a cause for concern?

Even as India’s aggregate fiscal position remains comfortable with the central government sticking to its fiscal consolidation roadmap, the recent fiscal profligacy seen in poll-bound states needs to be watched closely. In the recent union budget, the central government projected it would bring down the fiscal deficit to 4.9 per cent in FY25 and the finance minister also reiterated the government would continue to stick to the broad fiscal glide path and take the  deficit to below 4.5 per cent of GDP by FY26.

However, in recent months, many Indian states (which had elections last year or are due to this year) have promised an increase in welfare spending and stimulus, thus raising FY25 fiscal deficit estimates by 20bps. This could also weigh on states’ own capex spending, the UBS report stated.

State finances matters for macro stability as macro-fiscal stability issues are dependent on the fiscal balance at the Union and State levels. “States together mobilise more than one-third of general government’s revenue receipts, responsible for c40 per cent of  capital expenditure, and their share in public debt is around 35 per cent,” the report said.

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