India’s GDP Growth – Cyclically Slow, but Structurally Strong!

What’s the Point?

In its February 2025 Press Release, Ministry of Statistics and Programme Implementation (MoSPI) has stated that India’s Second Advance Estimates (SAE) of Real Gross Domestic Product (GDP) for FY 2024-25 has been marginally revised upward from its First Advance Estimates (FAE) – standing at 6.5% year-over-year (y-o-y) vs 6.4%. This upward revision has taken place due to a higher than expected growth in Private Final Consumption Expenditure (PFCE) and Exports versus the FAE published in January 2025. Even on a quarter-over-quarter basis, India’s Real GDP grew at a faster clip – 6.2% y-o-y in Q3FY25 vs 5.6% y-o-y in Q2FY25. While the growth in Gross Fixed Capital Formation (GFCF), which accounts for ~30% of India’s GDP, has been tepid in FY25, there has been some revival seen in Central Government capital expenditure in January 2025 as per Controller General of Accounts (CGA). At a broader level, India’s structural growth drivers remain intact, led by demographic dividend, growth in investments and consumption, robust services exports, improving manufacturing potential, and increasing digital adoption. Such strong drivers of economic growth, supporting sustained structural growth, could bode well for corporate profitability.

Numbers in Perspective

Source: Bloomberg, MoSPI; *PFCE: Private Final Consumption Expenditure, **GFCE: Government Final Consumption Expenditure, $Gross Fixed Capital Formation

What has led to a Cyclical Slowdown in GDP Growth in FY25?

1) By Sector: Compared to FY24RE, the y-o-y growth in secondary and tertiary sectors – like a) manufacturing (unfavourable base of 12.3% y-o-y growth in FY24RE), b) construction (slowdown in government capital expenditure, a moderation in private sector investment, and a relatively moderate order book for central government road projects), c) electricity, gas, water supply and other utility services (heavy rains and base effects), and d) financial real estate and professional services (slower growth in the real estate market, cautious lending by financial institutions, and a potential slowdown in professional services demand) – is expected to witness a major fall in as per FY25SAE (Refer to the chart above).

2) Slower Government Spends in the First Half of FY25:

• Capital Expenditure: As per data published by CGA in January 2025, the expenditure of the Revised Estimates of capex for FY25 (FY25RE) stood at 74.4% (₹7.57 lakh crore out of the budgeted ₹10.18 lakh crore) in 10MFY25 versus the 75.9% during the same period last year. The growth in capital expenditure was weak in 7MFY25, but it has seen some recovery with growth in 10MFY25 standing 5% higher than 10MFY24. The Government in the Union Budget FY2025-26 has budgeted a 10% growth in capital expenditure to ₹11.21 lakh crore over the FY25RE.
• Revenue Expenditure: Revenue expenditure growth in 10MFY25 remained ahead, with revised targets at ~76% of FY25RE growing at 6.8% y-o-y above 10MFY24. Among larger spending areas, revenue expenditure was relatively muted for transfers to states, education, and drinking water and sanitation, while healthy pace was seen in agriculture, health, rural development, and subsidies. The Government in the Union Budget FY2025-26 has budgeted a modest 6.7% growth in revenue expenditure to ₹3.9 lakh crore over FY25RE.

Cyclical Slow, but Structurally Strong

The February 2025 Monetary Policy Committee (MPC) highlighted that global economy is growing below historical average, with outlook being clouded by geopolitical tensions and policy uncertainties. Amidst such uncertainties, India stands tall with its GDP growth being the fastest in the world, and bulk of its structural challenges, like high non-performing asset levels of Indian banks, high fiscal deficit, high current account deficit, and elevated inflation levels, witnessed in the pre-pandemic era behind it. More importantly, the Government has been focussing on: a) leveraging our demographic dividend, b) improving liquidity conditions, c) harnessing macroprudential initiatives like bringing the fiscal deficit down to the Budgeted Estimate of 4.9% for FY25, d) building manufacturing capabilities through the PLI Scheme, PM Gati Shakti Mission and others, and e) increasing efficiency through digitalization.

Despite the Reserve Bank of India (RBI) noting that the high frequency indicators looked mixed as rural demand continues to improve and urban demand remaining subdued, RBI expects that a recovery in private consumption should help achieve Real GDP growth of 6.5% y-o-y in FY25. More importantly, with the demand side of the economy seeing an improvement through a pick-up in consumption (accounting for >60% of the GDP component), corporate profitability could see a pick-up, and the supply side of the economy could see an improvement on account of higher demand, falling inflation and potential interest rate cuts in addition to the 25 bps rate cut in the February 2025 MPC.

Sources: RBI, India Budget, PIB, Bloomberg, Morgan Stanley, MoSPI, and other publicly available information

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