– By Aditi Nayar
India’s latest GDP dataset pegged growth at a stupendous 7.6% in FY2024. However, in quarterly terms, growth is implicitly expected by the National Statistical Office (NSO) to compress to 5.9% in Q4 FY2024 after exceeding 8% for the previous three quarters. What are the reasons for this sudden dip, and what should one expect in FY2025?
In our view, a few transient factors are likely to keep GDP growth relatively modest in the next couple of quarters, with a back-ended pickup expected in H2 FY2025.
Firstly, the agri outcomes are likely to stay muted in the immediate term, a fallout of the unfavourable 2023 monsoon and continuing El Nino conditions. While a poor growth was penciled in, agriculture and allied activities had posted a surprising contraction in Q3 FY2024. As per the second advance estimates released by the Agriculture Ministry for 2023-24, the output of most rabi crops, barring wheat, is anticipated to decline, compared to final estimates of 2022-23, owing to a sharp fall in their yields. This is expected to continue to weigh on rural sentiments and consumption in the first half of FY2025, until there is some visibility around the farm cash flows from rabi procurement and outcomes for the next kharif crop.
In contrast, urban consumption demand is projected to remain healthy, albeit uneven in FY2025. This would be driven by the high-income households and newer entrants into the formal labour markets, that have a relatively high propensity to consume. The sentiment of other low income and middle-age middle-income households, which is assessed to have been tepid lately, may improve modestly, aided by the anticipated easing of food inflation. However, the tightening of norms for personal loans and credit cards by the Central Bank may adversely impact credit growth for these segments, which may weigh on discretionary consumption of urban households.
On a sobering note, the Government of India’s (GoI) revenue expenditure registered the fifth consecutive month of a contraction in Jan 2024 as per the provisional data. Moreover, the GoI’s capex declined by a sharp 40.5% YoY in Jan 2024. We fear a shortfall of at least Rs. 0.5 trillion vis-à-vis the revised target for the GoI’s capex for FY2024. Overall, while the growth in the GoI’s revex is expected to remain lackluster at ~3% YoY in Q4 FY2024, we estimate the capex to decline by at least ~9% in the quarter, which would weigh on GDP growth in the quarter.
Looking ahead, the GoI has pegged its on-budget capex growth at around 17% in FY2025 Budget Estimates (BE), as against the 25-30% expansion seen during each of the last four years. Additionally, the growth in the aggregate capex of 18 major states is pegged to moderate to around 12% in FY2025 BE (over FY2024 Revised Estimates or RE) from 33% in the FY2024 RE and the 21% growth seen in FY2023 Actuals.
In addition to the slowdown in the budgeted growth, the onset of General Elections in early-FY2025 may contain the pace of the GoI’s capex in the first few months of the fiscal. Thereafter, with the monsoon setting in from June, project execution and construction activities are likely to remain tepid. This suggests that capex may only pick up in a back-ended manner in FY2025, post the announcement of the full Budget and the end of the monsoon period.
Additionally, the GoI has penciled in a modest growth of 3% in its revex in FY2025 BE over FY2024 RE, in line with the low single digit growth seen in each of the last two years. Moreover, the aggregate revex of 18 major states is pegged to rise by 8% in FY2025 BE (over the FY2024 RE), a slowdown relative to the 18% expansion estimated in FY2024 RE. These trends are likely to dampen the YoY GVA growth of the public administration, defence and other services (PADOS) component of the services sector in FY2025, particularly in H1.
Amid a subdued outlook for global growth, we have penciled in continued tepidness in India’s exports in H1 FY2025, followed by some improvement in H2, supported by a likely pick up in global demand after the rate cut cycle begins in the major economies in mid-CY2024.
Exaggerated by the transient factors related to the El Nino and temporary lull in Government capex, ICRA expects the YoY growth in GDP to remain sub-6% during H1 FY2025, before accelerating to above 7% in H2 FY2025. Overall, we project the GDP growth at 6.5% for FY2025, which is still expected to be well above most advanced economies.
(Aditi Nayar is the Chief Economist, Head- Research & Outreach at ICRA.)
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