India's GDP growth slows to 6.5% in FY25 amid fiscal and global headwinds

India's economic growth for the fiscal year 2024-25 (FY25) has significantly slowed, with GDP expanding by only 6.5 per cent, the weakest pace in four years.

This decline from the previous year’s 9.2 per cent reflects a combination of domestic challenges, including fiscal stress, slower consumer spending, and external economic pressures. The government has faced difficulties in meeting its fiscal targets, and quarterly growth numbers indicate a downward trajectory almost throughout the fiscal year.

The economy grew at 7.4 per cent in the fourth quarter (Q4) of FY25.

Weakening growth and fiscal deficit pressures

India's growth slowdown was more pronounced in the first three quarters of FY25, with the economy expanding at 6.7 per cent in Q1 FY25, 5.4 per cent in Q2, and 6.2 per cent in Q3. The Q4 growth of 7.4 per cent helped somewhat, but the overall annual growth was still significantly below expectations.

Several sectors, including manufacturing, construction, and agriculture, faced headwinds, contributing to the deceleration.

Meanwhile, the Indian government is grappling with an increasing fiscal deficit, which reached alarming levels in FY25. Despite fiscal consolidation efforts, India's fiscal deficit for FY25 stood at₹15.77 lakh crore ($184.29 billion), slightly higher than the ₹15.70 lakh crore ($183.47 billion) estimated for the year, according to the provisional data released by the Controller General of Accounts (CGA) on May 30.

This widening deficit is primarily driven by higher-than-expected government expenditure, especially on welfare schemes, infrastructure development, and energy subsidies.

The Reserve Bank of India (RBI) has been forced to intervene, transferring a larger-than-expected dividend to the government to ease some of the fiscal pressures. This has provided some short-term relief, but the overall fiscal situation remains precarious.

Risks and future projections

The outlook for India’s economy in FY26 remains uncertain, with risks to growth continuing to mount. A key concern is the ongoing global economic volatility, which has affected trade and investment flows into India.

With slower growth in major economies like the US, Europe, and China, the Indian economy faces challenges in sustaining high growth in exports and attracting foreign investments into the country.

Additionally, geopolitical tensions and the continued impact of conflicts across the globe have further added to global instability, making it more difficult for emerging economies like India to maintain robust growth.

Inflation has remained persistently high throughout FY25. Although the RBI has cut interest rates in an attempt to curb inflationary pressures, the cost of food and fuel has continued to rise, limiting the purchasing power of the consumers and dampening overall demand.

The government has been working to contain inflation by implementing various supply-side measures, but the persistent price pressures and strain on global supply chains are expected to remain a challenge in the near future.

Looking ahead, India's growth prospects will largely depend on the government's ability to balance fiscal responsibility with necessary spending on infrastructure, social welfare, and job creation. The country will also need to focus on addressing structural issues such as labour market inefficiencies and bottlenecks in key sectors to drive future growth.

While the long-term potential of the Indian economy remains strong, immediate challenges require careful management of fiscal policy, inflation, and external factors that may hinder recovery.