Long haul for growth: How GDP dynamics may shape up in the coming quarters

Looking at India's growth performance from the expenditure lens indicates a pickup in the private consumption expenditure to 6.9% YoY in Q3FY25 compared to 5.9% YoY in Q2FY25

There was little doubt that India’s gross domestic product (GDP) would see an improvement in Q3FY25 on the back of festive demand. Real GDP growth was at 6.2 per cent in Q3FY25, up from an upwardly revised 5.6 per cent in Q2FY25. Gross value added (GVA) was also at 6.2 per cent in Q3FY25, compared to 5.8 per cent in the previous quarter.

 

The production side breakdown of the growth structure indicates a pickup in the agricultural sector’s production while the manufacturing sector’s growth also picked up.

 

While top line growth for the non-financial sector has been muted, a reduction in the input costs has led to an increase in profits for the manufacturing sector. On the other hand, the headline services sector growth and the components remained flat in Q3FY25 compared to Q2FY25.

 

Looking at India’s growth performance from the expenditure lens indicates a pickup in private consumption expenditure to 6.9 per cent year-on-year (Y-o-Y) in Q3FY25 compared to 5.9 per cent in Q2FY25. This was expected as Q3 corresponds to the festival period and wedding season.

 

Some data and anecdotal evidence also indicate that rural consumption has been picking up compared to urban consumption. The worry, however, on the expenditure side is that gross fixed capital formation (GFCF) or the investment demand grew at 5.7 per cent Y-o-Y in Q3FY25 and was almost flat compared to Q2FY25.

 

This was despite some strong pickup in the Centre’s capital expenditure (capex) that was noted for November and December 2024. However, for the quarter, it needs to be noted that state capex growth was relatively muted, thereby taking away some benefits of a higher Centre’s capex.

 

The critical question – how the growth dynamics will be looking in the quarters ahead. For FY25, the new real GDP estimates are at 6.5 per cent compared to the earlier estimate of 6.4 per cent. This implies a real GDP growth of 7.6 per cent for Q4FY25, a tall order in our opinion. Our model predicts a 6.5 per cent number for Q4FY25, translating into a 6.2 per cent real GDP growth for FY25.

 

Importantly, this is a number that was predicted by our model even earlier. But now, the previous year’s growth has been revised up to 9.2 per cent from the earlier 8.2 per cent. This implies that the growth dynamics are expected to be relatively better than was anticipated by us earlier. On the positive side, early indications are for a good rabi crop, and this should help sustain the agricultural growth and the consequent rural consumption.

 

Further, with inflation expected to sustain its cooling momentum into FY26, real wage growth should improve and thus provide a boost to consumption demand. However, there could be some headwinds to growth in FY26.

 

First and foremost is the uncertainty on the Trump announcements on tariffs and how the global supply chains get impacted due to this.

 

Trump’s position with respect to India is still not clear. If reciprocal tariffs are raised on India, India tends to lose out on exports to the US. On the other hand, Trump has indicated that he would go ahead with the previously announced tariffs on Mexico and Canada (that was kept in abeyance till March 4), while China tariffs may also be raised.

 

The risk of dumping from China, especially steel, remains important. It could lead to some worries for domestic steel manufacturers. We did indicate before that consumption can hold up due to inflation falling. The Union Budget has also provided a boost to the consumption story by reducing burden on the tax paying population.

 

While this may have a beneficial impact, it may not be very significant as only around 2 per cent of the Indian population pay taxes.

 

Further, all the income tax (I-T) benefits will not be spent, and some amounts may be kept aside to repay past debt and be saved.

 

While we expect the Centre and state capex to pick up in FY26, the worry on private sector capex may continue. This is due to global uncertainties and the consequent lack of visibility on demand — both domestic and external.

 

The monetary policy has also started easing and we expect another 50 basis points (bps) drop in the repo rate in FY26.

 

This should be reflected in the external benchmarks lending rate (EBLR)-linked loans and may provide some support to consumption and growth. Overall, putting all the above together, we estimate real GDP growth at 6.5 per cent.