India's Economy Likely To Grow At 6.5 Per Cent In FY26, Need To Boost Spending On Health, Education, Says EY

The March edition of EY Economy Watch estimated a real GDP growth of 6.4 per cent for the Indian economy for FY25 and pointed out that there is a need for fiscal policy adjustments.

Over the next two decades, India may need to gradually raise its public spending on education and health to bring it closer to levels observed in high-income nations, the report noted.

Source : Freepik

India’s economic growth is anticipated to reach 6.5 per cent in the fiscal year 2025-26, according to the latest EY Economy Watch report. The report underscored the importance of a balanced fiscal policy that promotes human capital development while ensuring fiscal discipline to support long-term economic expansion.

The March edition of EY Economy Watch estimated a real GDP growth of 6.4 per cent for the Indian economy for the 2024-25 fiscal year (FY25).

Looking ahead, the report projected the economy to clock a growth rate of 6.5 per cent in the upcoming FY26, reported PTI.

The report further pointed out that there is a need for fiscal policy adjustments to align with the country’s goal of achieving Viksit Bharat status.

Revised data from the National Statistical Office (NSO) released last month suggested that real GDP growth rates for FY23, FY24, and FY25 stood at 7.6 per cent, 9.2 per cent, and 6.5 per cent, respectively.

Quarterly projections for FY25 indicated a third-quarter growth of 6.2 per cent, requiring a substantial 7.6 per cent expansion in the fourth quarter to meet the annual GDP target.

Achieving this would necessitate a 9.9 per cent rise in private final consumption expenditure, a rate that has not been observed in recent years, the report cautioned.

Investment-Driven Growth Imperative

Given the challenges of achieving such high private consumption growth, the report suggested an alternative approach—boosting investment expenditure. It pointed out that government capital expenditure is a crucial driver of economic momentum. The fiscal deficit, as per the revised estimates, could be influenced by any additional supplementary demand for grants. However, a higher nominal GDP might provide some flexibility in absorbing these increases when fiscal deficit levels are assessed relative to GDP.

Focus On Education And Healthcare

The report also stressed that as India’s population expands and its economic structure evolves, increased investments in education and healthcare will be vital for sustaining growth and improving human capital outcomes. Over the next two decades, India may need to gradually raise its public spending on education and health to bring it closer to levels observed in high-income nations, it noted.

According to the EY analysis, government expenditure on education should rise from its current 4.6 per cent of GDP to 6.5 per cent by FY2048 to cater to the needs of the country’s young workforce.

Similarly, public health spending must increase from 1.1 per cent in 2021 to 3.8 per cent of GDP by FY2048 to ensure better healthcare access and outcomes. The report also highlighted the necessity for additional financial support to low-income states with larger young populations through equalisation transfers to meet their education and healthcare needs.

Revenue Mobilisation and Fiscal Adjustments

A gradual fiscal restructuring approach could help meet these targets without disrupting economic stability. The report suggested increasing the revenue-to-GDP ratio from 21 per cent to 29 per cent over time to generate the necessary resources while maintaining fiscal discipline.

DK Srivastava, Chief Policy Advisor, EY India, stated, “India's changing age structure is expected to increase the share of working-age individuals in the total population. If productively employed, this can create a virtuous cycle of growth, employment, savings, and investment. To achieve this, India may need to raise its revenue-to-GDP ratio and gradually increase the share of government spending on health, education, and infrastructure.”

The EY Economy Watch further explored the role of equalisation transfers in reducing inter-state disparities by ensuring that states with lower fiscal capacity receive adequate funding for social sector investments. The report concluded that a carefully designed fiscal policy focused on human capital development and financial prudence will be essential for securing India’s long-term economic prospects.