India’s GDP to stay at 6.5% in FY25 & FY26 provided govt accelerates capex in rest of the year: EY

India’s real GDP growth is projected to remain steady at 6.5 per cent for the financial years 2025 and 2026, according to the latest EY Economy Watch report.The report highlighted key fiscal and economic measures that could sustain and boost this growth trajectory.

It said, “In the medium-term, India’s real GDP growth prospects can be kept at 6.5 per cent per year provided the GoI accelerates its capital expenditure growth in the remaining part of the current fiscal year and comes up with a medium-term investment pipeline with participation from the Government of India and state governments”

A critical recommendation from the report is that the combined debt of the central and state governments should not exceed 60 per cent of the country’s nominal GDP. This limit would require each level of government to cap their debt at 30 per cent of GDP.

“The combined debt-GDP ratio target should be retained at 60 per cent but divided equally between GoI and states at 30 per cent each,” it said.

The report also emphasized the importance of balancing current income and expenditure at both the central and state levels to improve national savings.Achieving a national savings rate of 36.5 per cent of GDP in real terms, coupled with an additional 2 per cent contribution from foreign investments, could elevate the total investment level to 38.5 per cent. This level of investment is expected to support a steady economic growth rate of 7 per cent annually.The report also called for significant reforms in the Fiscal Responsibility and Budget Management (FRBM) Act to ensure fiscal discipline while supporting India’s growth ambitions.

One key recommendation is to make balancing the revenue account a priority for both the central and state governments. This would eliminate government dissaving’s, freeing up resources for productive investments essential for sustained growth.

It further proposes a fiscal deficit target of 3 per cent of GDP for both central and state governments. However, the central government should retain flexibility, allowing the fiscal deficit to range between 1 per cent and 5 per cent of GDP to manage unforeseen challenges like economic slowdowns.

The report highlights the importance of balanced fiscal policies and robust investments from households, businesses, and the public sector. With these measures, India is well-positioned to achieve long-term growth and economic stability.