India's Economy Projected to Grow at 6.5% in FY26: Key Insights from EY Report
India's economic trajectory continues to show resilience despite global headwinds, with the latest EY Economy Watch report projecting a 6.5% growth rate for the fiscal year 2025-26. This forecast comes as the country makes steady progress toward its ambitious Viksit Bharat (Developed India) goals, highlighting the need for strategic fiscal realignment to support long-term development.
Current Economic Performance
According to the revised national accounts data released by the National Statistical Office (NSO) last month, India's real GDP growth rates have been recalibrated at 7.6% for FY23, 9.2% for FY24, and 6.5% for FY25. For the current fiscal year (FY25), the third quarter growth has been estimated at 6.2%, necessitating a substantial growth of 7.6% in the fourth quarter to achieve the annual target of 6.5%.
Economic analysts note that achieving this fourth-quarter target would require an exceptional 9.9% growth in private final consumption expenditure – a level that has been rare in recent years. The alternative path would involve significantly boosting investment expenditure, where government capital expenditure plays a critical role in stimulating economic activity.
Fiscal Considerations and Challenges
The report highlights that the government's fiscal deficit, as per revised estimates, may be affected by subsequent supplementary demands for grants. However, higher levels of nominal GDP could provide some cushion for absorbing these increases when measuring the fiscal deficit relative to GDP.
The EY Economy Watch March edition projects India's real GDP growth at 6.4% for FY25, slightly below the NSO estimate, before climbing to 6.5% in FY26. This modest but steady growth projection underscores the importance of fiscal prudence while simultaneously investing in critical development areas.
Human Capital Investment: The Key to Sustainable Growth
A significant focus of the EY report is the need for enhanced investment in human capital development. With India's changing demographic profile and increasing working-age population, the report suggests that:
- Government education spending may need to rise to 6.5% of GDP by FY2048 from the current 4.6% to meet workforce requirements
- Health expenditure by the government should increase to 3.8% of GDP by FY2048, compared to just 1.1% in 2021
- Low-income states with higher proportions of young populations will require additional support through equalization transfers
DK Srivastava, Chief Policy Advisor at EY India, emphasized: "India's changing age structure is expected to increase the share of working-age individuals in the total population. If productively employed, this can create a virtuous cycle of growth, employment, savings, and investment."
Bridging Regional Disparities
The report also explores how equalization transfers can help address regional disparities across Indian states. These fiscal mechanisms could ensure that states with lower fiscal capacity receive adequate funding for social sector investments, particularly in education and healthcare infrastructure.
To sustain long-term growth, EY recommends gradually increasing India's revenue-to-GDP ratio from the current 21% to approximately 29% over time. This fiscal strengthening would provide the necessary resources for human capital investments while maintaining fiscal discipline.
Fourth Quarter Growth Challenges
The immediate challenge for the Indian economy lies in achieving the required 7.6% growth in the final quarter of FY25. Economic experts suggest that boosting government capital expenditure will be crucial to reaching this target, as the projected 9.9% growth in private consumption appears ambitious given historical trends.
Despite these short-term challenges, the overall outlook for India's economy remains positive, with steady growth projected to continue through FY26, supported by strategic investments in human capital and infrastructure development.
Looking Ahead: The Path to Viksit Bharat
The EY report concludes that a well-calibrated fiscal strategy that balances human capital development with fiscal prudence will be essential for enhancing India's long-term growth prospects. As the country continues its journey toward becoming a developed nation, investment in education, healthcare, and infrastructure—coupled with prudent fiscal management—will remain key priorities for policymakers.
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