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India’s economic growth measured by the Gross Domestic Product (GDP), fell sharply to 5.4 percent in the July-September 2024 quarter, marking the lowest quarterly growth in 18 months due to a slowdown in consumption. The growth indicates substantially lower than 6.7 percent of economic expansion reported in the preceding quarter of the current year and 8.1 percent reported in the corresponding period of the previous year. The July-September 2024 quarter GDP figure also missed economists’ forecasts of 6.2-6.4 percent.

National Statistics Office (NSO) revealed that India’s Gross Value Added (GVA), which measures economic activity across sectors, expanded by 5.6 percent, also missing the forecast of 6.5 percent. This was a notable slowdown from 7.7 percent growth year-on-year and 6.8 percent in the previous quarter.

Gaura Sen Gupta, Chief Economist at IDFC First Bank, said, “The deceleration in growth, below our expectations of 6.2 percent, was led by industry, while services sector growth held-up. Within industry, manufacturing growth slowed to a 6-quarter low at 2.2 percent. Non-financial listed company profits declined in the second quarter, with slowdown in revenue growth and lesser support from lower input costs. Services sector growth held-up at 7.1 percent year-on-year (yoy), with pick-up in ‘trade, hotels and communication’. Another source of support to services was rise in government revenue expenditure (ex. subsidies and interest costs).”

Rajani Sinha, Chief Economist, CareEdge Ratings, stated, “India’s July-September 2024 quarter GDP growth at 5.4 percent has come as a big negative surprise. While the GDP growth was expected to moderate as being indicated by some of the high frequency macro-economic indicators and weaker corporate performance, the quantum of deceleration is much sharper than expected. Lower growth is mainly because of poor industrial sector performance, specifically mining, manufacturing and electricity segment. The recovery of the agriculture sector continued with a good kharif harvest, and the services sector maintained its broad momentum.”

Investment moderation
There has also been a sharp moderation in investments. The government’s capex that had been supporting growth so far, saw a moderation, with the centre and consolidated state capital expenditure falling by 15 percent and 11 percent, respectively in the first half of the current financial year, i.e. between April-September 2024 period. However, the positive aspect is that consumption growth has remained healthy at around 6 percent in the July-September 2024.

“We expect GDP growth to pick up in the second half of the year as the government pushes up its capex spending. Agri production is estimated to be healthy and that should help further bolster rural consumption. Food inflation is also expected to moderate by the fourth quarter and that would be supportive of pick up in consumption. Beyond that urban consumption would be dependent on improvement in the employment scenario and real wage growth,” Sinha added.

Going forward, sustained momentum in consumption growth would be critical for private investment to pick up. The order book of capital goods companies and road development companies are showing a significant pick up in first half of the year and that bodes well for overall pick up in capex. However, weak growth in China and consequent flooding of markets like India would remain a deterrent for pick up in private investment.

On the external front, while merchandise exports growth is likely to remain muted in midst of global uncertainties, the momentum in services exports is likely to continue. Overall, Care Ratings expects India’s GDP growth of around 6.8 percent in the October 2024-March 2025 period.

Expenditure growth decelerates
On the expenditure front, investment growth decelerated, reflecting lesser support from government capital expenditure. State government capital expenditure continued to decline in the July-September 2024 quarter (at -5.9 percent yoy versus -24.6 percent yoy in the sequential previous quarter). Meanwhile, Central government capital expenditure had picked-up in Q2FY25 (July-September 2024) after contracting sharply in Q1 (10.3 percent yoy after contracting by 35 percent in Q1). Private consumption growth moderation is led by urban consumption losing steam. The latter reflects slowdown in urban wage growth with dip in companies’ profit growth. The wedge between GDP and Gross Value Added (GVA) remained negative in Q2FY25, with GVA growth exceeding GDP. This is despite pick-up in net indirect tax collection (less subsidy expenditure growth).

Revising down for the full year FY25 (April 2024-March 2025), GDP growth estimate to 6.3 percent from previous estimate of 6.6 percent. The weakness in H1FY25, is led by slowdown in urban demand and decline in general government capital expenditure. The seeds of moderation in urban demand were sown in H2FY24 with slowdown in urban wage growth. This is likely to persist in the remainder of FY25 as companies’ profit growth reduces. Electronic payments data shows a moderate pick-up in October-November, despite festival season. Given the uncertain outlook on consumption demand, both domestic and external, private corporate capex will remain tentative.

In H2FY25 growth momentum is expected to improve with government capital expenditure picking-up pace. This is reflected in sharp reduction in overall government cash surplus reducing from INR5.1tn as of May 2024 to temporarily going into deficit in mid-November 2024. Meanwhile consumption growth is expected to get support from rural demand in H2FY25, with crop output expected to be on the higher side.

Sectoral growth
Sectoral performance during the quarter presented a mixed picture. Agriculture posted growth of 3.5 percent, recovering from 2 percent in the previous quarter and 1.7 percent a year earlier. However, the mining sector contracted by -0.1 percent, a sharp reversal from 11.1 percent growth year-on-year and 7.2 percent in Q1FY25. Manufacturing growth decelerated significantly to 2.2 percent, compared to 14.3 percent in the same quarter last year and 7 percent in the previous quarter. The electricity segment slowed to 3.3 percent from 10.5 percent year-on-year and 10.4 percent sequentially.

Construction, a key driver of economic activity, recorded 7.7 percent growth, lower than the 13.6 percent growth a year ago and 10.5 percent in Q1FY25. Trade, hotels, and transport improved marginally to 6 percent growth compared to 4.5 percent year-on-year and 5.7 percent sequentially. Financial, real estate, and professional services grew by 6.7 percent, a slight improvement from 6.2 percent a year earlier but below the 7.1 percent recorded in the previous quarter. Public administration and other services, which include government spending, grew by 9.2 percent, up from 7.7 percent last year but slightly lower than 9.5 percent in Q1FY25.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers, said, "The weaker-than-expected GDP growth raises concerns about the sustainability of economic recovery, particularly as key sectors like manufacturing and mining face challenges. While agriculture and public spending provided some support, the overall momentum in private consumption and industrial output remains subdued. India's GDP growth in Q2 stood at 5.4 percent, falling below our projection of 6.7 percent and the street's estimate of 6.5 percent. This weakness in the numbers was largely due to discrepancies; net of these, GDP growth remained at a healthy 7.5 percent."

Dharmakirti Joshi, Chief Economist, Crisil, termed India’s Q2FY25 a ‘surprise slowdown’. “India’s gross domestic product growth slowed sharper than expected to 5.4 percent in the second quarter (Q2) of this fiscal year from 6.7 percent in the preceding quarter. Investments and manufacturing, the key drivers in the same quarter last fiscal, were the drags. Investments saw the sharpest slowdown (5.4 percent in Q2 versus 7.5 percent previous quarter), as support from government capital expenditure has been weaker this year. Private consumption, too, slowed (6 percent versus 7.4 percent) but grew faster than overall GDP growth. Some companies have talked about urban demand slowing down,” Joshi added.

Way forward
Joshi further stated, “We expect elevated interest rates and fiscal consolidation to weigh on GDP growth this fiscal. However, growth is becoming more balanced this year as consumption, which accounts for over 55 percent of GDP, is likely to fare better than last year. Meanwhile, rural demand is expected to drive improvement in consumption. The impact of healthy kharif production, coupled with gains from the festive season, is expected to increase demand in the second half. However, slowing credit growth is expected to weigh, particularly on urban demand.”


DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com