While FY25 GDP Growth slows, the Long-Term Growth Story remains intact!

What’s the Point?

Last week, the Ministry of Statistics and Programme Implementation (MOSPI) released the first advance estimates of the GDP growth for FY25 at 6.4%. While the overall numbers present slower growth picture, much of it is explained by what was seen in the first two quarters of the year. With these advance estimates reflecting extrapolation of numbers from the first 7-8 months of the financial year, there is potential for upside risks to these numbers, on account of potential revival in government spending, lower inflation, and higher consumer spends. Meanwhile, there are some concerns arising out of low credit growth, tight liquidity conditions, Rupee depreciation, etc. which warrant action to boost growth. On balance, 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. Looking at the big picture, India remains the fastest growing economy in the world with significant macroeconomic stability.

Numbers in Perspective

Source: Ministry of Statistics and Programme Implementation (MoSPI), International Monetary Fund (IMF), Centre for Monitoring Indian Economy (CMIE). FY25AE refers to First Advance Estimates from MoSPI. FY26E refer to GDP projections from IMF

What do the Underlying Numbers say?

• Consumption growth making a comeback: Private Final Consumption Expenditure (PFCE) is being projected to grow at 7.3% in FY25 in real terms, higher than 4.0% observed in FY24. Within consumption, several data points highlight a mixed recovery, with rural consumption growing well, while urban demand has been moderate. Improved monsoons, progressively lower inflation could bode well for consumption growth going forward.
• Lower growth in investments: Gross Fixed Capital Formation (GFCF) is being projected to grow at 6.4% in FY25, slower than 9% observed in FY24. This can be partly explained by slower spends by the central government, particularly on the capex front. On the other hand, capex by listed corporates grew at a healthy pace in H1FY25, and real estate sector investments by household have been robust.
• Stark reduction in net imports also providing growth impulse: While exports are projected to grow at 5.9% during the year, imports fell 1.3%, leading to lower net imports and therefore adding to GDP growth. To recap, GDP is the sum of Consumption + Investments + Government Spending + Net Exports (Exports – Imports) on what is called the ‘supply side’ of the GDP equation. While higher exports are a mix of growth in goods and services, lower imports could be attributed to the fall in Crude prices during the year. a benign outlook on crude and commodity prices indicate that net exports could remain favourable for India in the near term.
• Services growth continues to lead growth: on the Gross Value Added (GVA) side of the equation, services sector has continued above-GDP growth, at 7.2% YoY in FY25, vs 7.8% in FY24. While services export growth has been robust, domestic services sector demand has been subdued, with weakness in urban demand weighing on segments such as retail, hospitality, and financial services.
• Manufacturing sector growth lags, but can be seen in context of global manufacturing slowdown: India’s manufacturing sector grew 5.3% in FY25, vs 9.9% in FY24. This could be attributed to the demand slowdown, constrained pricing power, and elevated input costs. Globally, manufacturing growth has been weak, with India being the only country to see continuous robustness in Manufacturing Purchasing Managers’ Index (PMI) in excess of 50.

Conclusion

While headline GDP growth is projected to drop for FY25, the internal composition remains encouraging, especially with consumption and private capex showing signs of 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. As mentioned earlier, there are some concerns arising out of low credit growth, tight liquidity conditions, rupee depreciation, etc. which warrant action to boost growth. Upcoming weeks will throw more light on fiscal stimulus (Budget on 1 February) and monetary stimulus (Monetary Policy Committee meeting on 5-7 February).

Long range forecasts for Indian GDP growth remain at ~6.5% from multilateral and global agencies such as IMF. With the world growth being low at ~3%, 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: Bloomberg, RBI, MoSPI, CMIE, and other publicly available information

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