SBICap: Strong rural demand to drive India's economic growth

India’s economic growth could gain momentum over the next 15 months, thanks to the lasting impact of previous capital expenditure and strong rural demand, despite the current slowdown in consumer spending, according to SBI Capital Markets Ltd (SBICap).

In the second quarter of 2024-25, India’s GDP growth slowed to 5.4%, marking the weakest pace in seven quarters. The government’s first advance estimate projects GDP growth for FY25 at 6.4%, the lowest in four years.

SBICap’s latest economic forecast suggests that India’s GDP likely grew at 6.2-6.3% in the October-December period. The report cites strong rural demand driven by factors like a favorable monsoon, a robust kharif harvest, promising rabi sowing, and welfare schemes, all expected to support economic growth.

Additionally, while consumer spending (Private Final Consumption Expenditure, or PFCE) accounts for more than 60% of India’s real GDP, it has lagged behind gross fixed capital formation (GFCF) growth for seven quarters. GFCF, which refers to investments in long-term assets for production, has been a key driver of the economy.

SBICap’s report highlights that the government has recalibrated its capital expenditure plans, with an increase in funding for Central Sector Schemes and strategic Ministry-level reallocations, rather than a cut. The Union Budget for FY26 includes a capital expenditure target of ₹11.21 trillion, slightly up from ₹10.18 trillion for FY25, reflecting a steady focus on infrastructure and investment.

The Union government anticipates a 10.1% year-on-year nominal GDP growth in FY26, driven by continued capital expenditure and consumption stimulus. However, SBICap cautioned that uncertainties surrounding private sector capital expenditure and asset price volatility pose risks to this optimistic projection.

The government’s proposed direct tax cuts are expected to stimulate urban incomes, further boosting overall consumption. Additionally, the Reserve Bank of India’s recent 25-basis point cut in its policy repo rate to 6.25% is expected to encourage lending and further support growth, alongside the delayed implementation of the Liquidity Coverage Ratio (LCR) norms.

SBICap also noted that the delay in LCR norms would free up funds for banks to lend, providing a boost for infrastructure and manufacturing sectors, which have been hindered by limited credit growth.

While the global economic outlook remains subdued, with growth below historical trends, SBICap also pointed to potential disruptions in global supply chains due to the newly-elected US president Donald Trump’s proposed policy shifts. Short-term disruptions from tariffs could negatively impact supply chains and expose markets to risks from low-cost producers. However, India could benefit in the long run from the trend of manufacturing domestication.

In conclusion, SBICap sees a mix of rural demand, government spending, and monetary measures as key factors supporting India’s economic growth over the next 15 months.