ADB downgrades India’s growth forecast for FY25 and FY26 amid weaker investment, housing demand

New Delhi: The Asian Development Bank (ADB) said on Wednesday that it has revised India’s economic growth forecast for FY25 down to 6.5% from 7% and for FY26 to 7% from 7.2%, citing weaker-than-anticipated growth in private investment and housing demand, compounded by tight monetary policy.

These projections are a part of ADB’s Asian Development Outlook for December.

“The lower forecast for 2024 is mainly due to India’s lower-than-expected Q2 growth, driven by dampened manufacturing sector performance and lagging government spending,” the ADB said.

The Manila-headquartered multilateral development bank’s (MDB’s) revision comes a week after the Reserve Bank of India (RBI) significantly lowered the country’s growth outlook for FY25 to 6.6% from 7.2% earlier due to a slowdown in economic activities.

Reflecting slowdown

The adjustment for India’s FY25 growth outlook reflects a slowdown in growth during Q2, which fell to 5.4%, primarily due to weaker-than-expected industrial growth, though agriculture and services sectors remained strong, the ADB said.

Other risks for the Indian economy identified by the ADB include geopolitical threats to supply chains, adverse weather conditions, and the impact of tighter prudential norms from the central bank on unsecured personal loans.

Additionally, government capital expenditure in FY2024 is still lagging behind the budget target, the ADB said.

The bank, however, added that India’s underlying growth remains resilient, driven by strong agricultural output, a resilient services sector, lower Brent crude prices, and positive forward-looking indicators like PMI and rising urban labour force participation.

India’s gross domestic product (GDP) growth in the September quarter (Q2, FY25) fell to 5.4%, the lowest quarterly growth since Q3 FY23 (4.3%), due to uneven performance across sectors, with a decline in private consumption growth offsetting the positive effects of government spending and a rural recovery.

Slowed manufacturing

Manufacturing growth in the September quarter slowed to 2.2% from 14.3% in the year-ago quarter and 7% in the June quarter.

Construction sector growth slowed to 7.7% in Q2 from 13.6% growth a year ago and 10.5% in the first quarter.

However, agriculture reported a 3.5% growth for the latest July-September quarter, against 1.7% growth in the same period of the previous year and 2% growth in the June quarter. 

ADB also expects Asia and Pacific economies to grow 4.9% in calendar year (CY) 2024, slightly below its September forecast of 5%.

“In the near term, the outlook for most economies in the region remains relatively stable,” it said.

“Apart from uncertainty surrounding US policy changes, risks to developing Asia and the Pacific’s growth and inflation outlooks include escalations of geopolitical tensions as well as continued property market fragility in the PRC (People’s Republic of China),” it added.