Opinion GDP data: Growth is likely to pick up in second half of the year

The NSO’s 2024-25 estimate is marginally lower than our forecast of 6.5 per cent for the year. We anticipate the pace of expansion to accelerate to 6.9 per cent in the second half, owing to better outcomes for mining, manufacturing, trade, hotels, transport, communication and services related to broadcasting segments, and gross fixed capital formation relative to the implicitly assumed rates for this period in the first advance estimates. The dissipation of the monsoon-related disruptions that had dampened activity in the second quarter, an upbeat outlook for rural demand, as well as expectations of some improvement in government and private capex post the slowdown in the first half that was partly on account of the national elections, would support growth in these segments.

The first advance estimate is typically computed by extrapolating the data that is available up to October-November. Consequently, it can undergo an upward revision if an acceleration is expected in the last three-four months of the year. This is quite likely to be the case this year, although global uncertainties abound.

That said, some anomalies are visible in the implicit numbers for the second half, particularly on the expenditure side. Private final consumption expenditure is expected to accelerate to 7.8 per cent in the second half of the fiscal from 6.7 per cent in the first half, which seems to be optimistic. While an improvement in rural demand is likely to support growth, urban consumption is likely to remain uneven, with the slowdown in personal loan growth also weighing on discretionary consumption of households to some extent.

The nominal GDP number from the advance estimate is used by the government for the budgeting process. With this at Rs 324.1 trillion, slightly lower than Rs 326.4 trillion included in the Union budget for this year, the GoI’s budgeted fiscal deficit of Rs 16.1 trillion translates to 5 per cent of GDP, higher than the budgeted print of 4.9 per cent. However, we expect a large miss of Rs 1.4 trillion in the capex target, which would offset shortfalls on the revenue side, and translate into a somewhat narrower fiscal deficit vis-à-vis the budgeted levels. Thus, the lower-than-budgeted nominal GDP estimate would not cause a slippage in the fiscal deficit-to-GDP ratio, which is likely to trail the budget estimate of 4.9 per cent for the fiscal.

Turning to the outlook for 2025-26, ICRA expects the GDP expansion to remain steady at 6.5 per cent. The uptick in agricultural growth in the second half of this year is expected to support rural demand in the first half of next year, beyond which a normal monsoon turnout would be key. Urban demand, on the other hand, is likely to remain fairly uneven in the first half of next year as well. We do hope it will pick up thereafter with the anticipated dip in food inflation providing some respite to the low-and middle-income households.

On the investment front, private capex is expected to remain non-exuberant, with sluggishness in merchandise exports and unevenness in domestic consumption weighing on the same. In such a scenario, a healthy rise in government capex would be quite important. With the anticipated large miss in the GoI’s capex in 2024-25, there will be room for a low double-digit expansion in the same next year. However, owing to fiscal constraints, growth is expected to be much lower than the 25-30 per cent levels seen during 2020-21 to 2023-24.

Global developments could pose significant challenges to India’s GDP growth outcomes in 2025-26. Consequently, fiscal and monetary policy support would be important to backstop India’s macroeconomic outlook.

(The writer is senior economist, ICRA)