GDP growth slows to 5-quarter low of 6.7% in Q1FY25

The economists had predicted that the economy likely slowed down in the first quarter owing to a slowdown in government spending due to election activity in the first quarter and the adverse impact of heatwaves.

India’s economic growth slowed to a five-quarter low of 6.7 percent in the first quarter of the fiscal year from 7.8 percent in the preceding March quarter, as government consumption contracted owing to election-related activity, according to data released by the government on August 30.

"Slight slowdown in GDP was anticipated due to elections," said V Anantha Nageswaran, chief economic advisor.

The growth was subdued compared with the 8.2 percent jump witnessed in Q1FY24, but in line with the consensus estimate of Moneycontrol survey of 13 economists conducted last week, which had predicted 6.8 percent growth with forecasts ranging from 6 percent to 7.5 percent.

It was lower than RBI's forecast of 7.2 percent for the first quarter. But economists hint at a silver lining with the gross value added rising faster at 6.8 percent compared with 6.3 percent in the previous quarter.

"India’s GDP growth expectedly slowed down in Q1 FY2025 relative to Q4 FY2024, even as the GVA growth surprisingly accelerated between these quarters. This divergent trend was led by the normalisation of the growth in net indirect taxes, and the slowdown in the GDP growth is not a cause for alarm, in our view," said Aditi Nayar, chief economist, Icra.

Economists note that despite the fall the number brightens the outlook for growth

"On the whole the number is impressive and there is reason to be optimistic of 7 percent plus growth for the year," said Madan Sabnavis, chief eocnomist, Bank of Baroda, as he noted that the pick up in consumption, steady capital formation and better monsoon prospects are likely to support growth.

"Indian economy is sustaining the growth momentum. Outlook on growth remain strong," the CEA noted.

Economists, however, point that better growth prospects are likely to nudge RBI to hold teh policy rate at 6.5 percent for longer.

"This robust growth, coupled with falling inflation, is expected to support continued outperformance in the Indian equity market. However, the strong growth figures may prompt the Reserve Bank of India (RBI) to maintain the current monetary policy rates throughout 2024," said Sujan Hajra, chief economist, Anand Rathi Shares and Stock Brokers.

Many positives

The big takeaway according to economists is the rise in private consumption in the first quarter. Private final consumption expenditure expanded at the fastest pace in seven quarters of 7.4 percent compared with 4 percent growth in the previous quarter and 5.5 percent in the first quarter of previous fiscal.

"Rural consumption has stabilized. A good monsoon will give further filip in coming months," Nageswaran noted.

Investment also turned out to be a positive in Q1.

"Growth in investment as reflected by growth in gross fixed capital formation, at 7.5 percent in Q1FY25, mainly reflects growth in private investment since central government’s capital spending in the first quarter had remained negative," said DK Srivastava, chief policy advisor, EY India.

Capex utilisation has been lower with the government utilising just 16.3 percent of Budget estimates in the June quarter compared with 27.8 percent in the year earlier.

Industrial production in the first three months of the year was higher at 5.2 percent compared with 4.7 percent growth between April-June 2024, which was reflected in manufacturing numbers.

Manufacturing growth dipped to 7 percent from 8.9 percent in Q4FY24, it was still higher than previous year's number.

"Manufacturing has done better than expected at 7% which is higher than last year notwithstanding the fact that corporate profitability was muted," Sabnavis said.

Services growth rose to a four quarter high of 7.3 percent, rising from 6.7 percent in the previosu quarter. Construction also held steady.

"Construction sector showed further improvement, while the services sector maintained strong growth, particularly in trade, hotels, transport, communication and broadcasting services, and public administration services," said Rajani Sinha, chief economist, CareEdge.

Besides, government consumption which contracted 0.2 percent, agriculture was a disappointment with 2 percent growth in the first quarter, compared with 3.7 percent in the previous year. But economists posit there may be better days ahead.

"The low-base effect apart, improvement in agricultural growth and lower food inflation will augur well for private consumption, particularly in rural areas. Higher agricultural growth will augment income and lower food inflation will improve discretionary spending ability," said  Dharmakirti Joshi, chief economist, Crisil.

The Indian economy is still likely to grow over 7 percent in FY25 for the fourth consecutive year in a row.

"Overall, the growth outlook of the Indian economy remains steady owing to the favourable trend in consumption demand and pickup in private sector capex," said Paras Jasrai, senior analyst, India Ratings and Research.

Moneycontrol poll has pegged growth at 7 percent for the year.

Moody's Ratings, on August 29, raised India's growth estimate upward to 7.2 percent for 2024 compared with 6.8 percent earlier.

RBI expects the economy to grow 7.2 percent in FY25.