Tuesday's Talking Points
India Growth Story continues, and Becoming Broadbased Too!
What’s the Point?
Indian economy grew at 6.7% y/y in Q1FY25 growth in real terms (i.e. growth after adjusting for inflation). While the data marks a slower growth vs the previous quarter, this was driven by a base effect (higher growth in FY24 period), and election-related delays in government spending. Excluding these items, growth continued to be robust, with indications of pickup in private consumption and private capex. GDP growth estimates for India continue to be revised upwards, most recently by IMF that revised 2024-25 growth estimate from 6.8% to 7.0% on account of ‘notable rise in consumption prospects, especially in rural areas’. India’s economic growth and macroeconomic resilience place it well in this turbulent world.
Numbers in Perspective
Source: Centre for Monitoring Indian Economy (CMIE), International Monetary Fund (IMF)
Key Talking Points from the GDP Numbers
- High Growth in Investments continues, with Private Capex kicking in
Investments in the economy, measured by Gross Fixed Capital Formation (GFCF), grew at 7.5% in Q1FY25, growing faster than GDP. With reports and data from government records indicating that government capex had slowed down on account of elections, it is clear that growth remained robust on account of pickup in private capex. CMIE data indicates that 80% of new project announcements (in ₹ terms) in the past 12 months were from the private sector. Capex reported by Listed corporates has also grown sharply.
- Consumption – Strong Growth Potential translating to growth
FY24 saw weak private consumption growth, at just 4% YoY in real terms. Q1FY25 has shown a pickup, with consumption growth being reported at 7.4%. this mirrors the optimistic commentary by FMCG companies in their quarterly management commentaries. Drivers of recent pickup in Consumption include a normal / above-average monsoon, expectations of a better crop harvest, decreased inflation, higher consumer sentiment along with positive indicators of urban demand like increased vehicle sales.
- Manufacturing growth normalises, Construction continues recovery
Among sectors, Manufacturing sector normalised in growth, growing at 7% in Q1FY25 after three consecutive quarter of high growth. In fact, it is encouraging to see momentum continue, with July and August manufacturing PMI (Purchasing Manager’s Index) at 57.5 and 58.1 respectively, indicating expansion over the previous months. Construction has also been reporting high growth (10.5% YoY in Q1FY25 and 9.9% YoY in FY24), a corollary to higher GFCF. With continued government capex and pick up in private capex, outlook remains positive.
- Government spending pick-up in July
The central government’s fiscal deficit in 4MFY25 increased to 17% of FY2025BE as spending picked up after elections. Capital expenditure registered robust growth after the elections, especially in roads and highways. On the receipts side, direct taxes have registered a strong growth of 36% YoY.
Conclusion
While headline GDP growth has fallen marginally, the internal composition remains encouraging, especially with private consumption and private capex picking up. India’s GDP outlook for the long term remains positive on account of improving labour and capital supply and productivity. Resulting growth in profits for corporates could hold market return expectations steady in the long term.
RBI expectations for FY25 GDP growth currently stand at 7.2%, similar to forecasts by IMF and other global agencies which put the growth forecast in the 6.5%-7.5% range. With the world undergoing a growth slowdown, India may find it difficult to sustain high levels of growth. Near term risks include global headwinds from continued higher interest rates, evolving geopolitical developments, and crude oil prices.
Sources: CMIE, IMF, and other publicly available information
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