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India’s Economic Growth Forecast Steady Despite BJP Losing Parliamentary Majority

Forecasts for India’s economic growth remain steady despite the ruling Bharatiya Janata Party (BJP) losing its parliamentary majority in recent national elections. Previously, Asia’s third-largest economy grew at an impressive rate of 8.2% last fiscal year, the fastest among major economies.

However, growth is anticipated to slow to 7.0% this fiscal year and further to 6.7% the following year, according to a poll of economists conducted between June 19-27. These projections remain consistent with those made before the election results were known, where Prime Minister Narendra Modi’s party lost its substantial parliamentary majority.

Following the elections, the BJP formed a government with the support of regional parties and retained most of its ministers, indicating no immediate changes in policy. The government’s strategy has long focused on boosting gross domestic product (GDP) growth through significant capital spending.

India's Economic Growth Forecast Steady Despite BJP Losing Parliamentary Majority

India’s Economic Growth Forecast Steady Despite BJP Losing Parliamentary Majority

Despite this, the lack of private expenditure growth has left many Indians, especially the youth, either unemployed or in low-paying jobs. Economists, not expecting major policy shifts, have left their growth forecasts unchanged.

India’s economic growth in the last quarter was higher than most estimates due to a significant drop in key subsidies, which temporarily boosted GDP. However, this situation is unlikely to recur. The expected 7.0% growth rate for this fiscal year is slightly below the Reserve Bank of India’s (RBI) forecast of 7.2%, though the RBI has hinted that this could improve in the coming months.

Although growth is expected to slow, it will remain close to potential levels. Economists anticipate a modest pickup in private capital expenditure, though not as robust as the RBI’s expectations.

The government is likely to continue with fiscal consolidation while utilizing a large dividend transfer from the RBI for increased spending in the upcoming budget, which might include measures to support lower-income groups and boost consumption.

To stimulate consumption, the government is considering lowering personal tax rates. Most economists surveyed believe that the government will not significantly alter its planned spending in its first full budget compared to the interim one, though a minority expect an increase.

Despite the reduced majority, the government is expected to maintain its policies, increase funding for employment guarantee schemes, and create more jobs through manufacturing initiatives.

Supported by the RBI’s surplus and growing tax receipts, these initiatives aim to drive economic growth. Inflation is projected to remain above the RBI’s target, averaging 4.6% this fiscal year, with a potential interest rate cut by the RBI later in the year.

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