India’s economy clearly did better than what the earlier data for FY23 and FY24 suggested. Even in the third quarter of FY25, the gross domestic product (GDP) growth has been reasonably good at 6.2% as it comes on a high base of 9.5%. But there is no denying that the economy has lost considerable momentum and will grow much below its potential in the current year and probably next year too. In fact, the headwinds from the Trump administration measures in the area of trade and tariffs could seriously impact business at home. The economy is now expected to clock in a growth of 6.5% for FY25, implying that the March quarter must pull off a number of 7.6% year-on-year (y-o-y). That is a tall order even allowing for the Maha Kumbh factor. Even if growth hits 6.5%, it would be a four-year low.
That said, a closer look at the Q3 numbers suggest key segments of the economy are still not pulling their weight. Both consumption and investment have been somewhat lacklustre. For instance, in the peak festive period, private final consumption expenditure has risen at 6.9% y-o-y, which is not bad except that it comes off a modest base. Manufacturers of consumer products have been talking of muted demand for many months now. Some high-frequency indicators such as car sales show it’s mainly the high-end models that are selling well. In general, demand for lower-end products — as reflected in their sales — appears to be weak. Between them, inflation and a slower rise in incomes have crimped purchasing power.
Unfortunately, investments remain sluggish. As a share of the GDP, the gross fixed capital formation (GFCF) in Q3 was the lowest in 12 quarters having increased by just 5.7% y-o-y. This is a troubling signal that the private sector isn’t really committing capital to fresh capacities. In fact, the rise in the GFCF was the slowest in six quarters. It is actually government expenditure, which went up by a sharp 8.3% y-o-y, the highest in five quarters, that helped push up growth. On the supply side too, the manufacturing space has disappointed for the second straight quarter, albeit on an unfavourable base. It is agriculture that did much of the heavy lifting registering an increase of 5.6% y-o-y. That is an impressive number but comes off a very favourable base. To be sure, though, it augurs well for rural demand. Services like trade and transport have fared reasonably well but this was to be expected in the peak festive and holiday season.
The 6.5% growth estimate for FY25 is predicated on a pick-up in private consumption — probably driven by better rural demand. The sharp 17% fall in February car sales, however, is a big concern. Exports, which are estimated to report a 7.1% rise this fiscal, driven by services, too are expected to boost the GDP. Despite the unfriendly environment, the economy could report a 6.5-6.6% growth in FY26 with consumption holding up on the back of rural recovery, the multiplier effect from the `1.1 lakh crore income tax giveaway, lower inflation, interest rate cuts, more liquidity, and therefore better credit flows. While the Budget has little fiscal impulse, government expenditure is likely to be more front-ended boosting both demand and liquidity. The worse may be behind us but the next couple of years don’t look like they’re going to be exciting.