India's GDP may grow at four-year low of 6.4% in FY25: Govt's first advance estimates

India's GDP may grow at four-year low of 6.4% in FY25: Govt's first advance estimates

India’s growth is set to dip to 6.4 percent in FY25, its lowest level in four years, pulled down by a likely decline in manufacturing and investment growth, according to preliminary data released on January 7.

The first advance estimates released by the government showed that growth is likely to settle below the 7 percent mark for the first time in four years.

"India’s gross domestic product (GDP) growth is expected to decelerate to 6.4 percent this fiscal, from the above-trend growth of 8.2 percent last fiscal, due to a sharp slowdown in the second quarter, lower fiscal stimulus, high interest rates and stricter lending norms," said Dharmakirti Joshi, chief economist, Crisil.

Although the economy had performed well in the first quarter of FY25, recording a 6.7 percent increase, growth slumped in the second quarter, declining to a near two-year low of 5.4 percent.

Growth averaged 6 percent in the first half and is likely to average 6.8 percent in the second, as per the latest numbers.

The high-frequency numbers released last week weren’t too encouraging either. While services activity climbed to a four-month high in December, manufacturing dipped to a 12-month low.

The gross value added numbers indicate that the manufacturing sector is expected to witness a slowdown with growth falling to 5.3 percent from 9.9 percent in the previous year.

Similarly, investment growth also disappointed with growth falling to 6.4 percent from 9 percent witnessed in the previous year.

Investment rate, calculated in nominal terms, was at its lowest level of 30.1 percent in three years.

"The decline in GFCF growth to 6.4 percent in FY25 reflects the subdued investment demand in the economy. Government capex which was the lifting factor in revival of investment demand post COVID appears to have tempered off largely due to general elections and focus on fiscal consolidation. While household investments which are mostly in the real estate sector have been steady in FY25, private investment has been muted," said Paras Jasrai, senior analyst, India Ratings and Research.

On the other hand, consumption is expected to grow faster at 7.3 percent compared with 4 percent in the previous year, while agricultural growth is also expected to outperform at 3.8 percent compared with 1.4 percent in FY24.

"Healthy agri growth and likely moderation in food inflation should help boost consumption in the months to come. Sustained consumption growth will also help pull in private investment," said Rajani Sinha, chief economist, CareEdge.

Positive momentum

While the first estimate pegs growth lower than the Reserve Bank of India's forecast of 6.6 percent in FY25 and the government's estimate of 6.5-7 percent, economists indicate some upside in coming months.

"While the NSO’s implicit H2 FY2025 projections seem reasonable, some of the sectoral numbers could report higher growth prints in H2 FY2025, in our view. For instance, the growth rates for the mining, manufacturing and THTCS segments are likely to exceed the assumed rates, given the dissipation of the adverse impact of excess rains that impacted growth in Q2 FY2025, the anticipated uptick in rural demand, and favourable base effect in some segments," said Aditi Nayar, chief economist, Icra.

On the nominal growth front, estimated growth of 9.7 percent also casts a shadow on the fiscal deficit number.

If the government’s fiscal deficit does keep to its target, then the fiscal deficit ratio is likely to slip to 5 percent of the GDP.

However, amid low capital spending, experts expect fiscal deficit to stay contained at 4.9 percent.

Better outlook

The outlook for FY26 was better with economists predicting a faster growth rate in the coming year, buoyed by higher consumption.

"For FY26, we expect real GDP growth at 6.7%. The most important monitorable would be a more broad-based pick up in consumption demand, especially amid reports of slowing urban consumption. The other critical aspect would be a meaningful pickup in private investment in the coming quarters," said Sinha from CareEdge.

However, others indicate that geopolitical and climate risks could spoil the growth momentum for coming year.

"We project the Indian economy to expand 6.7% next fiscal in the base-case scenario, underpinned by public infrastructure spending, lower crude oil prices, normal monsoon and monetary easing. That said, policymakers must remain vigilant in the face of escalating geopolitical and climate risks," Joshi noted.