Manufacturing slump likely to hit India's Q2 GDP growth to six-quarter low

High-frequency indicators suggest that India’s economic growth is likely to hit a six-quarter low in the September quarter (Q2) of 2024-25 (FY25), with moderation especially in the manufacturing sector.

 

During the June quarter of FY25, the economy grew 6.7 per cent. The Reserve Bank of India (RBI) has pared down its forecast to 6.8 per cent in its October bulletin, from 7 per cent projected by Governor Shaktikanta Das during the October monetary policy briefing.

 

The Central Statistical Office is scheduled to release the GDP data on November 29.

 

In Q2, the index of industrial production (IIP), which includes manufacturing, electricity, and mining, slowed to grow by 2.6 per cent, down from 5.45 per cent growth in Q1. Among other high-frequency indicators, growth in steel and cement consumption, bank credit, domestic passenger vehicle (PV) sales, and two-wheeler sales also eased in Q2 compared to Q1. However, the Centre’s capex, goods and services tax e-way bills, and domestic aviation traffic picked up sequentially during the September quarter. 

 

Gaura Sen Gupta, chief economist at IDFC First Bank, said the GDP growth estimate was tracking at 6.2 per cent for the September quarter, with moderation in manufacturing sector growth. “Listed company results show a decline in profit growth in Q2FY25, with a slowdown in revenue growth. Urban demand weakness persists, with softer fast-moving consumer goods (FMCG) sales growth, consumer goods production, and a decline in PV sales. Urban wage growth has moderated since H2FY24, reflecting moderation in companies’ profit growth,” she said.

 

On a positive note, Sen Gupta said growth would be supported by rural demand and higher government expenditure. “FMCG rural sales volume growth outpaced urban sales for the second consecutive quarter in Q2FY25. Government revenue expenditure picked up pace in Q2 after declining in Q1. Government expenditure patterns had been disrupted in Q1 due to the general election,” she added.

 

The RBI, in its October outlook, said supply chain pressures eased in September, falling below historical average levels, although they remain vulnerable to geopolitical risks, which escalated in October.

 

“Some high-frequency indicators have, however, shown a slackening of momentum in Q2FY25, partly attributable to idiosyncratic factors like unusually heavy rains in August and September,” the report said.

 

State Bank of India, in a report, said high-frequency indicators show that aggregate demand continued to grow in Q2, albeit with slower momentum than in the preceding quarters, painting a somewhat mixed picture. “For instance, domestic PV sales, which are an indicator of urban demand, as well as other indicators of consumption and demand, such as diesel consumption, electricity demand, and bitumen consumption, have eased. Transport and communication indicators, such as passenger and freight traffic at airports and toll collection, are showing traction,” it added.

 

SBI tracked 50 leading indicators, which indicate a dip in Q2FY25. “The percentage of indicators showing acceleration declined to 69 per cent in Q2 FY25, compared to 80 per cent in Q2FY24 and 78 per cent in Q1FY25. Though we believe this is a temporary impasse, the narrative might change completely in Q3 onwards,” it added.