GDP shows an uptick, but Q4 holds the key for 6.5% growth in FY25

With 6.2 per cent growth in Q3, the Indian economy will need to clock a growth rate of 7.6 per cent in January-March or Q4. Chief Economic Adviser V Anantha Nageswaran said there are three reasons why its possible: one, good performance of exports, both merchandise, non-petroleum, non-gems and jewellery, which is rising at almost 10 per cent rate for the entire April-January period. Two, capex for the current financial year up to the end of January is “very much in line” with the expenditure incurred in the previous year, the CEA said. “Almost, 75 per cent (of the target) has been expended as of January-end, which is same or slightly lower than the amount spent last year. So, government capex — after the initial slow start because of the election — has really picked up in the third quarter,” he said.

Three, a “huge spending in January, spilling over into February, associated with the Mahakumbh, where 50-60 crore people have visited and spent additional sums of money”. “This can also add to the GDP quite significantly from the expenditure side. So, in that sense, the implied fourth quarter GDP number of 7.6 per cent doesn’t look that unrealistic,” Nageswaran said.

The upward growth momentum in FY25 is seen mainly on account of a strong agricultural growth rate of 4.6 per cent and an estimated growth of 7.6 per cent in the private final consumption expenditure (PFCE) — an indicator of consumption demand.

Manufacturing is, however, seen subdued in FY25 at 4.3 per cent versus 12.3 per cent a year ago. Due to lower public spending in the initial part of the year, the government final consumption expenditure (GFCE) is seen slowing to 3.8 per cent in FY25 versus 8.1 per cent a year ago.

Investment demand, as indicated by Gross Fixed Capital Formation (GFCF), is seen muted at 6.1 per cent in FY25 as against 8.8 per cent in the previous year.

In Q3, GFCF was slowest in seven quarters, at 5.7 per cent. Manufacturing growth was also subdued at 3.5 per cent in Q3 as against 2.1 per cent in Q2 and 14 per cent in the corresponding period previous year. GFCE picked up sharply to 8.3 per cent in Q3 from 3.8 per cent a quarter ago and 2.3 per cent a year ago.

As per the Controller General of Accounts data released Friday, the Central government’s capital expenditure grew 5 per cent year-on-year to Rs 7.57 lakh crore during April-January.

Economists, however, pointed out that even while the public sector capex has grown at a healthy rate, private sector capex is lagging. “Investment to GDP ratio fell to a three-year low at 31.9 per cent in Q3FY25. This is despite a 47.7 per cent rise in capital expenditure by the Centre in nominal terms. The subdued investment demand indicates further weakness in private corporate capex and possible moderation in household investment in real estate,” Gaura Sen Gupta, Chief Economist, IDFC FIRST Bank said.

Sector-wise breakup of the GDP data showed that agriculture performed well, with the sector’s growth rising to a six-quarter high due to robust kharif crop output. “This means that the rural economy has done well and will be one of the engines of growth. Rabi output is also expected to be good which should push demand in the coming year too,” said Madan Sabnavis, Chief Economist, Bank of Baroda.

Manufacturing has remained subdued at 4.3 per cent. “Growth in manufacturing growth has been revised downwards, and this is not surprising as corporate profitability has been under pressure in FY25. The 4.3 per cent growth can be explained by underperformance. Also companies in the consumer space have lamented on urban stress due to inflation. This has pushed back consumption and hence output,” he said.

Apart from the GDP revision for FY24, the GDP growth rate for 2022-23 has also been revised up to 7.6 per cent as against 7 per cent earlier. “The nominal growth curve has also been lifted upwards as compared to earlier estimates, showing healthier growth rates of 14 per cent, 12 per cent and 9.9 per cent respectively in these three post-COVID years. Thus, the post COVID recovery was clearly underestimated earlier,” DK Srivastava, Chief Policy Advisor, EY India said.

Higher levels of nominal GDP may also imply a lowering of fiscal deficit and debt relative to GDP as compared to the budget estimates. “This may provide some fiscal space in 2025-26 for uplifting government demand, both consumption and investment, which is needed to combat the current growth slowdown,” he said.

Among other sectors, mining and quarrying growth is seen at 2.8 per cent in FY25, lower than 3.2 per cent in the previous year. In Q3, mining and quarrying growth grew 1.4 per cent as against a contraction of 0.3 per cent in the previous quarter and a growth rate of 4.7 per cent in the year-ago period.

‘Electricity, gas, water supply & other utility services’ are seen growing at 6.0 per cent in FY25 as against 8.6 per cent growth in the previous year. Construction is seen growing at 8.6 per cent in FY25, lower than 10.4 per cent growth in the previous year.

Services sector is seen growing 7.3 per cent in FY25 compared with 9.0 per cent in FY24. The growth in services is primarily led by ‘Public administration, defence & other services’ that is seen growing at 8.8 per cent in FY25, unchanged from last year. Other services are seen growing at a slower pace, with ‘Trade, hotels, transport, communication & broadcasting services’ seen growing at 6.4 per cent in 2024-25 as against 7.5 per cent growth in 2023-24, while ‘Financial, real estate & professional services’ are seen growing at 7.2 per cent as against 10.3 per cent in the previous year.

Going ahead, economists said it will be a challenge to achieve a 7 per cent-plus growth in Q4 to meet the 6.5 per cent growth estimate for FY25. “The possibility of achieving a 7 per cent plus growth in Q4 FY25 looks challenging, especially at the current juncture which has been marred by renewed geopolitical risks which may keep investment demand by private players at bay and in wait-watch mode. The positive news has been the moderating inflation, which is expected to decline to 4.5 per cent in Q4 FY25. This would provide a boost to the real wages and thus the consumption demand,” Paras Jasrai, Senior Economic Analyst, India Ratings and Research said.