GDP growth still resilient: India maintains momentum despite Q1 slowdown

The high difference noticed in the GVA and GDP growth during the 3 rd and 4 th quarter of FY24 has eased in Q1FY25

Against the Reserve Bank of India’s (RBI’s) projection of 7.1 per cent, India’s first quarter (Q1) 2024-25 (FY25) gross domestic product (GDP) growth came in at 6.7 per cent. This is in line with market expectations and significantly lower than the 7.8 per cent recorded in the fourth quarter (Q4) 2023-24 (FY24) and 8.2 per cent in Q1FY24.

The quarter witnessed decreased government consumption and investment spending due to the parliamentary election. Yet, India continues to be one of the fastest-growing large economies in the world, demonstrating continued growth momentum driven by investment and consumption despite geopolitical tensions and fears of a potential recession in key economies and financial markets.

The high difference noticed in the gross value added (GVA) and GDP growth during the third and fourth quarters of FY24 has eased in Q1FY25. The significantly higher GDP growth compared to GVA in the last two quarters occurred due to higher net tax (gross tax minus subsidy) collection.

While manufacturing GVA grew by 11.5 per cent and 8.9 per cent in the third quarter (Q3) of FY24 and Q4FY24, respectively, the manufacturing output growth, as captured by the Index of Industrial Production, grew by 6.2 per cent and 5.1 per cent in the same quarters.

The much higher GVA growth compared to output growth indicates higher margins/profits and, in turn, a higher tax payout by corporates, which seems to have normalised in Q1FY25.

The largest demand driver of the economy from the demand side, private final consumption expenditure, grew at 7.4 per cent in Q1FY25 (Q4FY24: 4 per cent and Q1FY24: 5.5 per cent).

Besides unemployment concerns, one of the major dampeners of consumption demand, especially for households in the lower 50 per cent of the income bracket, has been sustained high food inflation.

Although headline inflation may look a bit softer in the second quarter (Q2) of FY25 due to the base effect, the RBI expects inflation to edge up in Q3FY25 as base effects taper off.

The sustained momentum in manufacturing and services suggests steady urban demand, while steady progress in the monsoon and a pick-up in kharif sowing indicate that rural demand may also pick up during the festival season this financial year.

Gross fixed capital formation grew at 7.5 per cent in Q1FY25 (Q4FY24: 6.5 per cent and Q1FY24: 8.5 per cent). This reflects robust investment activity led by the government’s continued thrust on infrastructure spending.

High-frequency data from core infrastructure sectors such as coal, steel, and electricity points to a robust outlook. Moreover, the healthy balance sheets of corporates and banks are supporting this outlook. This is evident from a recent RBI study, which indicates that based on the projects sanctioned by banks/financial institutions (FIs) during FY24, a significant rise is expected in the capital investment of private corporates.

The total cost of projects sanctioned by banks/FIs increased to a record high of Rs 3.91 trillion in FY24. The infrastructure sector continues to attract the major share of envisaged private corporate capital investment, which is expected to complement the government’s efforts in the roads & bridges and power sectors.

As mentioned earlier, government final consumption expenditure (GFCE) remained tepid in Q1FY25 and registered a negative 2 per cent growth (Q4FY24: 0.9 per cent and Q1FY24: negative 0.1 per cent). Given that the government’s focus has shifted towards capital expenditure, the growth of GFCE will remain muted and is unlikely to contribute significantly to GDP growth.

Exports of goods and services recorded a growth of 8.7 per cent in Q1FY25 (Q4FY24: 8.1 per cent and Q1FY24: negative 6.6 per cent), albeit on a low base. Similarly, imports registered a growth of 4.4 per cent (Q4FY24: 8.3 per cent and Q1FY24: 15.2 per cent), albeit on a high base.

As the global economic outlook remains uncertain and nearshoring is gaining traction in global trade, India’s exports, especially merchandise exports, will remain under pressure.

On the supply side, the prospects of agriculture have brightened with recent monsoon progress and kharif sowing. Though agriculture grew 2.7 per cent in Q1FY25, it is expected to perform much better in Q2FY25.

Industrial growth at 8.2 per cent in Q1FY25 is encouraging, as it shows industrial growth is holding up after recording 6 per cent, 13.6 per cent, 10.5 per cent, and 8.4 per cent in Q1, Q2, Q3, and Q4 of FY24, respectively. Even more encouraging is that the industrial growth is quite evenly driven by all four components of the industry: mining, manufacturing, electricity, and construction, for five consecutive quarters. This indicates that, from a skewed growth, industrial growth is now becoming broad-based.

Services, the bellwether of the Indian economy, grew at 7.2 per cent in Q1FY25 (Q4FY24: 6.7 per cent and Q1FY24: 10.7 per cent) despite a high base. Within services, while trade, hotels, and transport grew at 5.7% in Q1FY25, financial, real estate, and professional services grew by 7.1 per cent.

Despite some growth slowdown in Q1FY25, the Indian economy as a whole shows not only resilience but also momentum. Therefore, recording a 7 per cent plus growth in FY25 does not seem challenging.

The pressure point, though, will continue to be consumption demand, but hopefully, the pick-up in rural demand in the second half of FY25 will balance out any slackness in urban demand. However, inflation, especially food inflation, will remain the joker in the pack, impacting consumption demand and the RBI’s monetary policy.

The author is an economist. Views expressed are personal