FY25 GDP growth a tale of two halves as economy withstands global shocks

India’s growth momentum surprised positively with a strong rebound in March at 7.4 per cent, which is fastest pace of expansion in the last four quarters. Growth was driven by investment spending led by government. Imports too were soft explained by softer oil prices. From the supply side, growth is driven by agriculture which has been buoyant after last year’s monsoon. Construction spending has been resilient not only in the quarter but over the last three years led by a real estate upcycle. On the other hand, private consumption demand was relatively muted at 6 per cent in the quarter given tepid urban demand when rural demand has been holding up well. 

 

Is the positive surprise on growth sustainable or one-off? The only downside to growth that one can visualise is external demand because of uncertainty on tariffs and its effect on global growth, in particular the US (27 per cent of world GDP). This may impinge on private sector capex as well. But other domestic growth drivers seem far more sustainable. For instance, rural demand should continue to hold up well given another year of good monsoon. Oil prices too are expected to be lower than last year which is positive for fiscal (lower subsidies and possibly higher excise duties), corporate margins, and inflation. Tax cuts announced in the Union Budget should support urban demand and so should transmission of lower interest rates seen in repo linked loans. Hence, growth in FY26 is now expected at 6.4 per cent (6.2 per cent earlier) which is closer to last year’s level but lower than potential as well as trend seen over the last decade. This makes a case for the Reserve Bank of India (RBI) to continue to lower policy rates by another 50 bps to support growth when inflation is likely to be below target after a span of six years.

 

While GDP growth in FY25 is seen at 6.5 per cent, it is clearly a tale of two halves. During the first half, India’s economy grew by only 6.1 per cent which pales in comparison with 6.9 per cent seen in the second half of the financial year. Muted government spending and uneven rainfall impacted growth in first-half. With acceleration seen in March, growth in second-half is closer to the potential. However, there are a few one-offs in March such as elevated government capex to meet the revised target laid out in the Budget, lower subsidy pay out which explains the growth differential between GVA (supply side) and GDP (demand side) along with large contraction in imports in real terms. Even so, there are enough durable factors (explained earlier) which should support growth. The only negative on growth could be lower goods exports led by weaker exports to US which have increased by 32 per cent over the last two months as against overall increase in goods exports of 4.5 per cent only.

 

Growth rebound is also visible in the supply side with GVA growth increasing to 6.8 per cent in March quarter led by agriculture at 5.4 per cent. The upward momentum in agri production is seen from September onwards which is explained by favourable rainfall in the last year. This is likely to sustain given anticipation of above normal monsoon. This also bodes well for food inflation and thus urban consumption since real wages should increase at a much faster pace this year. Construction activity too has remained buoyant not only in March quarter at 10.8 per cent but through the year at 9.4 per cent in FY25. In fact, construction activity has increased at 9.6 per cent over the past three years and outlook is favourable. Even services growth has been resilient led by public admin, defence, and ‘other services’ at 8.7 per cent in March and 8.9 per cent in FY25, respectively. Even financial services, real estate, and professional services activity been buoyant at 7.8 per cent in March and at 7.2 per cent in FY25, respectively. While there is some deceleration seen in credit growth and real estate activity, monetary easing by RBI should support interest rate sensitive real estate sector. What is noticeable is that despite buoyant air travel and hotel occupancy in the quarter, trade, hotels, transport and communication segment has not reported a large increase in growth at 6 per cent in March as against 6.1 per cent in the year.

 

In summary, while growth may not sustain at the pace seen in March quarter, but there are enough and more tailwinds outlined which should support growth momentum in FY26 closer to last year’s pace. Given benign inflation outlook and growth still lower than potential, MPC should continue on reducing policy rate by another 50 bps. This should improve capacity utilisation and thus encourage private sector capex. Room to cut more should open up in case global growth environment deteriorates and MPC should highlight the same in its policy due next week.  

 

The author is head of Economic Research Group at ICICI Bank