India’s GDP growth decelerated to a 5-quarter low of 6.7% YoY in Q1 FY25 from 7.8% in Q4 FY24. To be sure, market participants were expecting moderation on account of the general election and adverse weather conditions apart from the impact of the higher base factor. However, the actual headline GDP growth print turned out to be marginally softer than street expectations. 

We would dismiss the softer than expected GDP growth print as evidence of a slowdown, and would rather focus on the GVA data, which we maintain, is a better proxy for measuring India’s economic activity. With this context, we note that GVA growth showed a pick-up to 6.8% YoY in Q1 FY25 from 6.3% in Q4 FY24. This is not only divergent from the trend in GDP growth, but it is also stronger than market expectations which was in the range of 6.5%.

The wedge between growth in GDP and GVA reversed and turned negative in Q1 FY25, with GVA growth exceeding GDP growth by 10 bps (GVA growth was lower than GDP growth by an average of 100 bps in FY24). This reflects a pick-up in subsidy expenditure in Q1 FY25, after contracting sharply in H2 FY24. Meanwhile indirect tax collection growth also moderated in Q1 FY25.

Key highlights of Q1 FY25 data 

• From GVA perspective:
  1. Agriculture and allied sectors posted an expansion of 2.0% YoY, up from a subdued level of 0.5% growth seen on average during H2 FY24. Although the agriculture growth in Q1 FY25 is lower than its long period average of 3.7%, we take comfort from the muted impact of extreme summer coupled with severe heatwave conditions and a disappointing start to the south-west monsoon season.
  2. Growth in industrial value-add was steady at 8.3% YoY vs. 8.4% in Q4 FY24. At a granular level, value-add in Mining sector accelerated amidst a delay in the onset of the south-west monsoon season. Extreme summer conditions also supported higher output by the Utilities sector, which clocked a double-digit expansion. Double-digit growth was also witnessed in Construction, which also drove higher steel consumption. Nevertheless, Manufacturing GVA moderated to its lowest in 4-quarters at 7.0% YoY on account of moderation in IIP and higher input price inflation (WPI inflation accelerated to 2.4% YoY in Q1 FY25 from 0.3% in Q4 FY24). 
  3. Services sector saw a moderate improvement at 7.2% YoY, led by higher value-add by Public administration, defence, and other services which grew by 9.5%. Higher revenue spending (excluding interest payments) by the state governments and possibility of a traction in other services (like education, health, and recreation) may have led to such growth.
  4. Growth in other services sectors, viz., Trade, hotels, transport, communication’ as well as ‘Finance, real estate and professional services’ broadly held up, despite an adverse base at play. 

• Glancing through the demand side components of GDP, we note that:
  1. Private consumption growth posted its best performance in 6-quarters at 7.4% YoY. Private consumption growth improved despite adverse weather conditions (disappointing start to monsoon and intense heatwaves that affected some consumer-oriented businesses by curtailing footfalls), possibly outweighed by moderation in retail inflation, as well as a nascent pick-up in rural demand as validated by improvement in two-wheeler, tractor and FMCG sales.
  2. Government consumption posted a minor contraction, weighed down by election related curbs on central government’s revenue (ex-interest payments) spending.
  3. Meanwhile, investment demand improved. Since this happened in the backdrop of contraction in public capex during the quarter, one could attribute the improvement to higher private capex spend.
  4. On the external front, while demand for exports rose to a 5-quarter high, import demand decelerated to a 5-quarter low. As such, the percentage point contribution of the external sector (exports less imports) to headline GDP growth rose to 67 bps in Q1 FY25 from 8 bp in Q4 FY24. 

Outlook

As outlined earlier, the underlying strength in the GVA data (a better proxy for India’s economic activity) dismisses concerns of a slowdown yet, and in fact continues to point towards economic resilience despite transient headwinds from election related curbs in government spending and adverse weather conditions.

To be sure, some of the headwinds would intensify in the coming quarters:

• Urban consumption is likely to moderate amidst normalisation of post COVID demand, esp. for contact intensive services. In addition, lagged impact of higher interest rates as well as tighter regulatory measures for unsecured lending, are likely to weigh on discretionary demand for goods.
• The rate of growth in public capex will moderate in FY25 over FY24 as government adheres to the fiscal consolidation target.
• We expect WPI inflation to jump to 3.0% in FY25 from -0.7% in FY24. This sharp reversal amidst a moderation in output price inflation (CPI is projected at 4.5% in FY25 vs. 5.4% in FY24) would weigh upon corporate margins, thereby reducing the boost to value-add seen in FY24.
• Geopolitical uncertainty in the Middle East region is far from settled. In addition, election related uncertainty in the US and its impact on global trade is factor that needs to be watched.

However, these headwinds could get offset by tailwinds such as:

• Primary sector growth is expected to bounce back sharply amidst support from a surplus rainfall in the ongoing south-west monsoon season. This augurs well for of rural consumption demand, which has started to see tailwinds from declining inflationary pressures, increase in rural wages and continued fiscal support measures.
• With political and policy continuity post general elections, there is a strong likelihood of some pick-up in private investments. 

On net basis, we revise up our FY25 GVA and GDP growth estimate to 6.8% and 7.0% respectively from 6.6% and 6.8% earlier. While this would still indicate deceleration compared to FY24 GVA and GDP growth of 7.2% and 8.2% respectively, a significant part of this can be attributed to normalization of indirect tax effect (that provided an extraordinary leg-up to GDP data in FY24) and higher input cost inflation which can moderate the value-add on the supply side.

Says Suman Chowdhury, Executive Director and Chief Economist “Expectedly, GDP growth in Q1FY25 at 6.7% is largely in line with market expectations. The gap between GVA and GDP growth has narrowed significantly due to higher subsidies payouts in the first quarter of the year. At 6.8% YoY, GVA growth is 50 bps higher than what had been reported in Q4FY24 and is clearly a confirmation of the continuing momentum in the general economic activity. In particular, growth in the construction sector at 10.5% YoY has surprised on the upside given the expectation that the sector typically slows down during the election period.

We had expected a recovery in private consumption based on a pickup in rural demand manifested through high frequency indicators such as 2W sales but the extent is higher than our expectations at 7.4% YoY. Further, agriculture sector growth has picked up to 2% which is likely to grow further in the subsequent quarters. The growth in exports has also been higher at 8.7%, supporting the healthy GDP growth.

We have revised our annual forecast slightly upwards to 7.0% for FY25. Government capital expenditure will continue to be a major pillar of such growth as in the previous year but the kicker is likely to come from higher private sector capex; at the same time, higher growth in private consumption from the rural sector is likely to augment the growth figure.”

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

Chart 1: Net indirect taxes caused an unusual divergence between GVA and GDP growth in FY24