India’s GDP growth accelerated sharply to a 4-quarter high of 7.4% YoY in Q4 FY25 from 6.4% (revised up from 6.2% earlier) in Q3 FY25, thereby posing a sizeable positive surprise compared to market consensus expectation of ~6.8%.  Along similar lines, the supply side estimate as captured by the GVA data also depicted a similar outturn with Q4 FY25 growth improving to a 4-quarter low of 6.8% YoY from 6.5% (revised up from 6.2% earlier) in Q3 FY25.

Key highlights:

• The key source of support came from investments that clocked a 7-quarter high annualized growth of 9.4% vs. 5.2% in Q3 FY25. This is likely to have captured the impact of thrust on public capex disbursal.
  1. After performing dismally in the first half of the year (with Q1 and Q2 annualized growth of -30.7% and 4.9% respectively), the general government capex accelerated sharply in the second half of the year (with Q3 and Q4 annualized growth of 27.9% and 28.0% respectively).
• In addition, there’s statistical comfort from the annualized contraction in imports (that helped to boost net exports) and an improvement in net indirect taxes (as after getting front loaded, subsidy disbursals saw a fall in Q4). 
• The other drivers of GDP, viz. private consumption, government consumption, and exports, saw a deceleration in momentum.
• On the supply side:
  1. Improvement was predominantly led by the industrial sector – by activities in construction, mining, and manufacturing.
  2. On the services front, the improvement in Finance, real estate, and business services was offset by loss of momentum in Trade, hotels, transport & communication sector along with Public administration, defence & other services.
  3. While agriculture value-add moderated by 130 bps to 5.4% YoY in Q4 FY25, it remained higher than the long-term average growth of ~4.0%, with support from healthy rabi produce.

Inference and outlook

The quarterly activity performance corroborates a moderate improvement in momentum in high frequency indicators. This is marginally better compared to the early trend seen in Global GDP growth (see Chart 1 below). We note that directionally, India’s GDP growth performance has turned out to be broadly in line with that of Global GDP, with intermittent quarterly divergences on account of weather-related factors (affecting India’s agriculture output) and government spending (specific to election related temporary disruption that was witnessed during Q1 and Q2 FY25). 

On the current burning subject of elevated global trade uncertainty, we note that it is likely to have played a supportive role during Jan-Mar 2025 as most countries would have attempted to maximize merchandise trade activities ahead of the announcement of US reciprocal tariffs in Apr-25. This is corroborated by the sharp spike in world trade volume growth over Jan-Mar 2025 (see Chart 2 below). This is manifested in case of India’s GDP performance as well, where net exports ratio to GDP printed at a 91-quarter high of +3.7% (it is usually negative).

Having said so, we also acknowledge that heightened global trade unpredictability marked by policy flip flops in the US and volatility in communication would eventually depress global demand in the medium term through the channels of investment and sentiment. In a validation, the IMF in its World Economic Outlook published in Apr-25, pruned its forecast for 2025 and 2026 World GDP growth by 50 bps and 30 bps to 2.8% and 3.0% respectively (with risks tilted to the downside) from an estimated growth of 3.3% for 2024.

This is likely to drag on India’s GDP growth performance in FY26. Having said so, some of the external spillover risks could potentially get mitigated by the much-anticipated India-US bilateral trade agreement, the first phase of which is getting expedited and could get announced by end Jun-25. Beyond global trade spillover risks, the domestic drivers for India’s GDP appear to be supportive:

• Monsoon expectations were good to begin with. In recent days it has got better with the IMD upgrading its forecast for rainfall during the south-west monsoon to clock a surplus of 6% (vs. the long period average) from 5% earlier. This will continue to buoy rural consumption demand.
• Meanwhile, urban consumption is likely to derive support from (i) provision of income tax relief in the FY26 Union Budget, and (ii) ongoing easing of monetary policy along with relaxation of regulatory strictures constraining NBFC credit.
• At an aggregate level, domestic consumption would also benefit from moderation in inflationary pressures (we project CPI inflation to undershoot its target and print at 3.8% in FY26, the lowest in the post COVID phase).
• While investment and manufacturing activity would face downside risks from an adverse global trade environment, softening of international commodity prices, redrawing of bilateral trade pacts, and a revival in domestic demand conditions would play an offsetting role. 

Overall, we maintain our FY26 GDP growth projection of 6.4% (with downside risk). The estimate could get fine-tuned with better clarity on global trade prospects in the next 1-3 months.

Below is Acuité Ratings & Research Limited's comment: 

"India’s Q4 FY25 GDP growth of 7.4% reflects a strong cyclical rebound, but the full-year growth figure of 6.5% is still the lowest in four years, which clearly shows underlying structural frictions. The economy is expanding, but not necessarily accelerating in a broad-based manner close to its potential rate.

On the production side, the standout performance of the construction sector (10.8% growth in Q4) and public administration services (8.7%), which makes the govt spending our driving force. The revival in the primary sector, with Q4 growth at 5.0% versus just 0.8% a year earlier, and an annual uptick to 4.4%, is encouraging, particularly for rural demand. Yet, this improvement is partially base-effect driven and remains vulnerable to climate volatility. From a demand perspective, Private Final Consumption Expenditure (PFCE) rose by 7.2%, improving from 5.6% the previous year. However, the recovery is uneven; rural consumption has improved, but urban demand remains fragmented, constrained by stagnant real wage growth, high youth unemployment, and cautious discretionary spending.

Investments, mainly from the public side, have outshone while private capex remains tepid, albeit expected due to the global and economic frictions leading to some hesitation in the market. The investment-led recovery is welcome, but its long-term impact on productivity and employment will depend on whether it triggers multiplier effects through backward linkages and SME participation.

The nominal GDP growth of 9.8% against a real growth of 6.5% implies a GDP deflator of around 3.3%, meaning our inflation is range-bound. This growth number, with the current background of low inflation, creates some monetary space. We continue to expect the RBI to deliver two more 25 bps rate cuts this year, in June and Aug.”

Table 1: Snapshot of India’s GDP and GVA: Sectoral break-up

Chart 1: India’s GDP growth broadly tracking the trend in global growth

Chart 2: World merchandise trade volume picked up ahead of tariff announcements