Fall in Q1 GDP growth no cause for alarm, say experts, predict 7% growth in FY25

New Delhi: India’s economic growth fell 150 basis points year-on-year (y-o-y) in the first quarter of FY25 (April-June) to 6.7%, which was also marginally below the 6.85% predicted by a Mint poll of 25 economists.

Sequentially, the growth in gross domestic product (GDP) moderated 110 basis points from 7.8% in the January-March quarter, due to a dip in government capital expenditure amid the general elections and a fall in urban consumer confidence, data released by the statistics ministry on Friday showed. Gross value added (GVA) growth, which measures the total value of goods and services produced in an economy, stood at 6.8% in Q1.

India’s chief economic advisor (CEA) Anantha Nageswaran, in a presentation after the release of the latest GDP data, said that growth momentum remains strong. “In Q1FY25, all components of real GDP on the demand side grew at a faster pace than GDP, backed by strong investment demand and upbeat business sentiments, except gross fixed capital formation (GFCF).”

The fall in the Q1 GDP growth rate is generally in line with economists’ expectations, who cited high base effect, adverse weather conditions, and restrictions on government activities due to the code of conduct during the general elections held in May-June as primary reasons.

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“A slowdown in GDP was expected (during Q1, FY25). We have evidence from the quarter's data that there is a slowdown in the economy. Immediate revival of private capex is required,” said Debopam Chaudhuri, chief economist at Piramal Enterprises Ltd.

Chaudhuri added that the RBI's stance on keeping the repo rate unchanged has also impacted growth. “The more the RBI delays the rate cut, the revival of the economy is likely to get more delayed and, possibly at some point, impact GDP growth, putting it beyond the control of monetary policy,” he added.

To be sure, the RBI has kept the repo rate unchanged at 6.5% since February 2023. Repo rate is the interest rate at which the RBI lends money to commercial banks and financial institutions in India.

Others said despite this slowdown, the underlying data presents a positive outlook, with a notable increase in private consumption and a modest improvement in investment activity.

“While the Q1FY25 GDP growth has come in softer than expectations, the GVA has remained firm, with non-farm growth holding up well,” said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.

Rumki Majumdar, economist at Deloitte India said that the GDP and GVA growth converged in the first quarter from a 1.5% discrepancy in the previous two quarters. “This should reduce the inflation pressure as the demand and supply sides converge,” she said.

Projections for the full fiscal

Bhardwaj added, “We retain our GDP growth expectations of 6.9% in FY2025, aided largely by rural demand and government spending while watching closely the likely fatigue in urban demand, private capex and pace of global slowdown.”

Sujan Hajra, chief economist & executive director at Anand Rathi Shares and Stock Brokers, expects full-year GDP growth for FY25 to be around 7%. “This robust growth, coupled with falling inflation, is expected to support continued outperformance in the Indian equity market,” he said.

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In the CEA’s presentation, Nageswaran said, “In the medium term, the Indian economy can grow at a rate of 7% plus on a sustained basis if we can build on the structural reforms undertaken over the last decade.”

To be sure, the Reserve Bank of India (RBI) has estimated economic growth at 7.2% for the full fiscal year 2024-25, while the International Monetary Fund (IMF) has projected 7% growth.

The fine print

Strong growth in Q1FY25 was recorded by manufacturing (7%), construction (10.4%) and utility services (10.5%) like electricity, gas, and water supply, compared to 5%, 3.2% and 8.6%, respectively, in the same period of the previous year.

Agriculture reported 2% growth in Q1FY25, against 3.7% in the same period of the previous year; mining reported 7.2% growth in Q1FY25 against 7% in the year-ago period.

“Manufacturing activities were stronger than what we anticipated based on the IIP (index of industrial production) numbers from April to June. However, construction growth was robust at 10.5%. Services did well and continued to support overall growth,” Majumdar said.

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GFCF, an indicator of investment, picked up pace at 34.8% on an annual basis in Q1FY25, against 34.6% in the same period of the previous year.

The government's final consumption expenditure stood at ₹4,14,945 crore in Q1, down from ₹4,15,961 crore in Q1 of FY24. Household consumption or private final consumption expenditure saw 56% growth in Q1FY25, against 55.9% in the same period of the previous year.

Looking ahead

Meanwhile, chief economic advisor Nageswaran mentioned in his presentation that healthy progress in the monsoon and higher kharif sowing bode well for rural demand and agriculture output, while strong corporate and bank balance sheets and improved fiscal balances of the government and commitment to fiscal consolidation, alongside capex push will give the economy the needed impetus for growth going ahead.

Nageswaran said the government's focus is on the priority areas—agriculture, employment and skilling, inclusive human resource development and social justice, manufacturing & services, urban development, energy security, infrastructure, innovation, research & development, and next-generation reforms.

The presentation by the chief economic adviser however added that potential corrections in financial markets may impact household finances and corporate valuation, while election outcomes across the world and their implications for global trade and investment is something to lookout for.

"Escalation of geopolitical conflicts may lead to supply dislocations, higher commodity prices, reviving inflationary pressures and stalling monetary policy easing with potential repercussions for capital flows," the presentation said.

"Climate volatility to pressurise commodity prices, green transition, and agricultural supply. Softening of consumer confidence index as households lower their optimism on employment situation and income," it added.

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