Farm, services slowdown push GDP growth rate to five-quarter low of 6.7%

Chief Economic Advisor V Anantha Nageswaran said the slower GDP growth rate was “well within the consensus anticipation”. “The conduct of elections brought down capital spending. That is reflected in the government final consumption expenditure,” he said.

“Growth is expected to pick up hereon with an improvement in rural consumption demand and will be 6.5-7 per cent in this financial year,” CEA said. When asked about the slower pace of growth in tertiary or services sector, which posted an overall growth rate of 7.2 per cent in April-June as against 10.7 per cent in the year-ago period, Nageswaran said there was a very strong recovery in the first two-three years after the Covid-19 pandemic and those high levels have been maintained, resulting in a strong increase in base.

With capital expenditure by the government having contracted by 35 per cent in April-June (and contraction of 18 per cent in April-July), economists said that the government will have to put in extra effort to make up for the loss in spending in the initial months to boost growth going ahead.

“The main reason for the lower growth performance can be linked to the underspending reflected in GoI’s capital expenditure growth in the first quarter, which as per CGA’s data was (-)35.0 per cent. In both the interim and final budgets for FY2025, the GoI has provided for an annual growth in capital expenditure of around 17.0 per cent. In order to make up for the loss of momentum of capital spending, the GoI will have to make an extra effort to accelerate it in the post monsoon months of the fiscal year,” DK Srivastava, Chief Policy Advisor, EY India and Advisory Council to the 16th Finance Commission said.

Sectorally, agriculture posted a Gross Value Added (GVA) growth rate of 2.0 per cent in April-June as against 3.7 per cent growth in the year-ago period, while mining grew by 7.2 per cent as against 7.0 per cent. In the services sector, Trade, Hotels, Transport, Communication & Broadcasting Services recorded GVA growth of 5.7 per cent in April-June, slower than 9.7 per cent in the year-ago period. Financial, Real Estate & Professional Services grew by 7.1 per cent in Q1 compared with 12.6 per cent in the year-ago period, while Public Administration, Defence & Other Services grew by 9.5 per cent in Q1 as against 8.3 per cent in the year-ago period.

Overall growth rate in GVA terms came in lower at 6.8 per cent in April-June as against 8.3 per cent in Q1 FY24. Usually, GVA comes in lower than the GDP, but this time it was 0.1 percentage points higher. GDP is GVA plus net product taxes (taxes – subsidies).

“Usually, real GDP growth exceeds GVA growth due to a positive contribution of indirect taxes net of subsidies. However, central government subsidies show a low growth of 3.6% in the first quarter and a negative growth of (-)10.9% in the first four months of FY2025. This implies that even going forward, the growth rates of GVA and GDP may remain close together,” Srivastava said.

Government expenditure contracted by 0.2 per cent in Q1 as against a contraction of 0.1 per cent in Q1 FY24. Investments — as reflected in Gross Fixed Capital Formation (GFCF) — grew by 7.5 per cent as against 8.5 per cent in the year-ago period, which economists said mainly reflects growth in private investment since central government’s capital spending in the first quarter had remained negative.

“The GFCF growth increased to 7.5 per cent YoY in 1QFY25 from a four-quarter low of 6.5 per cent in 4QFY24. Notably, the public sector capex (union, 24 states and central public sector enterprises) was sharply down by 33.3 per cent YoY to Rs 3.8 trillion in 1QFY25. The major components apart from public sector for capex are households and the private sector. A stagnation in the public sector capex (in view of the parliamentary elections) along with a steady capex by the household sector (as visible via the housing sales data) indicates a modest pickup in the private sector capex,” Paras Jasrai, Senior Economic Analyst, India Ratings said.