India’s economy likely grew at a five-quarter low of 6.7% in Q1FY25, mainly due to slower manufacturing and agricultural activity, coupled with a decline in government expenditure, a median of an FE poll of 17 economists showed.
At 6.7%, the growth will be the lowest in five quarters. The Reserve Bank of India (RBI) had projected the gross domestic product (GDP) to grow at 7.1% in the April-June quarter, and at 7.2% in the entire fiscal year. The National Statistical Office (NSO) will release the Q1FY25 GDP data on August 30.
“The general momentum of domestic economic activity has witnessed some moderation in the first quarter, with some high frequency indicators indicating an adverse impact of the general elections along with the excessive summer heat conditions in some sectors of the economy,” said Suman Chowdhury, chief economist, Acuite Ratings & Research.
“Lower growth in industrial output along with lower than expected profitability may translate to weaker GVA growth in the manufacturing sector,” he said, while adding that a partial recovery in rural demand during the quarter, may however, lead to a better growth in private consumption.
In Q1FY25, the factory output growth, as measured by the Index of Industrial Production (IIP), however, grew 5.1%, which is higher than 4.3% growth recorded in the same quarter of previous. But, the manufacturing GVA may still be lower (than 5% in Q1FY24), because of higher input prices, which will depress growth. “Listed companies results show slowdown in profit growth in Q1FY25 with pick-up in input cost pressures,” noted Gaura Sen Gupta, chief economist, IDFC FIRST Bank.
In FY24, input cost inflation, as reflected in the WPI, was extraordinarily low, which boosted manufacturing GVA. This is likely to reverse in FY25, as WPI is expected to average around 3% this year (vs -0.7% in FY24), say economists.
Rajani Sinha, chief Economist at CareEdge, says the agriculture sector in Q1FY25 will feel the pinch of lower reservoir level from last year’s poor monsoon and heat waves affecting productivity. The construction sector growth is likely to moderate as well due to the impact of elections. But, the services sector growth is expected to further accelerate led by Financial, Real Estate, and Professional Services.
On the expenditure side, the contraction in government expenditure in Q1, due to election-related restrictions, will further impede GDP growth, say economists. During the quarter, total government expenditure contracted by 7.7%, driven by a significant 35% reduction in capital expenditure.
Sen Gupta highlights that urban consumption is showing signs of moderation with slowdown in passenger vehicle sales and FMCG sales growth. “Meanwhile, rural consumption which was subdued last year is showing nascent signs of improvement,” she said.
On the net exports front, the increase in overall trade deficit in Q1FY25 to $22.56 billion from $21.03 billion in Q1FY24, is likely to drag down growth, though an accurate estimate of its impact couldn’t be calculated as the GDP data is not correlating with the trade data, say economists.
For the full year FY25, most economists anticipate GDP growth to be slightly lower than 7%. In the subsequent quarters, the agricultural sector is expected to see improved growth due to a good monsoon, despite ongoing distributional challenges. Additionally, an increase in the government’s capital expenditure in the upcoming quarters, will further support overall growth, says CareEdge.