FY25 GDP growth of 6.4% underwhelms, but are there silver linings?

Real gross domestic product (GDP) growth is estimated to have slowed sharply to 6.4 per cent in the current financial year (FY25) from 8.2 per cent expansion in FY24, according to the first advance estimates released by the National Statistics Office (NSO). Nominal GDP growth was more stable, at 9.7 per cent in FY25 versus 9.6 per cent growth in the last. That growth compares unfavorably with the 10.5 per cent growth assumed by the central government in making the estimates for the Budget in July. However, the government is not going to be too perturbed about achieving the modest additional fiscal consolidation required to hit the fiscal deficit target of 4.9 per cent of GDP. Buoyant revenue collections and weaker capex spending so far indicate scope for bigger savings. 

 

The slowdown in real growth in FY25 looks sharp but may be exaggerated. The supply-side estimate for value addition, captured in the gross value added (GVA) metric, is more reliable compared to the demand-side measurement of output captured in GDP, in the case of India. Typically, the gap between the two metrics is modest, and both have grown 6.4 per cent in FY25. But that was not true in FY24 when GDP growth was a full percentage point higher compared to GVA, with the latter pegged at 7.2 per cent. Nevertheless, the 6.4 per cent growth estimated for GVA and GDP is still below the trend growth or potential growth of the economy. 

Headline growth was quite weak heading into the Covid period but averaged 6.4 per cent and 6.7 per cent in the five years between FY16 and FY20 for GVA and GDP, respectively. Compared to that period, India has nurtured a new growth driver in the form of services exports. The health of the banking sector and corporate balance sheets also looks better, while the economy has adjusted to key reforms initiated in that period (such as the transition to the GST regime). On the flip side, government debt levels have gone up, and household leverage has also increased. While household debt levels still look comfortable, the buildup was likely too quick, and debt servicing could be impinging on urban demand in the backdrop of sluggish real wage growth. Pinning down potential growth is difficult, but these drivers together suggest a suitable range of 6.5-7 per cent (i.e., at least in the same ballpark as the pre-Covid period) and likely closer to 7 per cent. 

One silver lining is that headline growth still implies stronger performance in the second half of this financial year (H2 FY25), and more so when comparing it with the shockingly weak GVA/GDP growth of 5.6 per cent/5.4 per cent in the July-Sep period. GVA and GDP growth averaged 6.2 per cent and 6 per cent, respectively, in H1, but are penciled to expand 6.6 per cent and 6.7 per cent, respectively, in H2. That growth is more in sync with trend growth. The caveat is that these estimates by NSO are based on data available for the first eight months of FY25 only and require heavy extrapolations for making the full-year estimate. In the past, growth in the First Advance Estimates has been upgraded as well as downgraded, albeit growth in the previous two financial years was revised higher. But the latest estimate looks realistic. 

The NSO estimates imply stronger growth in the agriculture sector and government spending as key drivers of better growth in H2. Agriculture GVA growth is seen accelerating to 4.5 per cent in H2, from 2.7 per cent in H1. The growth in private final consumption expenditure (PFCE) on the demand side is accordingly higher, and that is the biggest part of GDP. Note, PFCE growth in FY25 (7.3 per cent) is estimated to grow at a much faster clip compared to FY24 (only 4 per cent) when headline GDP growth was far stronger, and that is another silver lining. Strong growth in the labor-intensive construction sector (8.6 per cent), which continues to grow at a much faster clip compared to the pre-Covid period, is encouraging as well. Overall, the NSO estimate confirms growth in H1 FY25 was dragged lower excessively on account of one-off factors, even as the economy is still performing below potential. 

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 The author is senior vice-president & economist at ICICI Securities PD