India’s GDP growth slumped to its lowest level in seven quarters at 5.4 percent in the second quarter of FY25, as mining growth contracted to an eight quarter low and manufacturing and utility services took a hit, clouding outlook for the full year growth estimates according to experts.
"Following today’s downbeat data release, the outlook for H2 FY2025 is decidedly mixed...On balance, ICRA expects GDP growth to pickup in H2 FY2025, on the back of Government capex, agri output and rural consumption, resulting in a full-year expansion of 6.5-6.7 percent," said Aditi Nayar, chief economist, Icra.
The economy had grown at 6.7 percent in the previous quarter and 8.1 percent in the year-ago period.
"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," said Rajani Sinha, chief economist, CareEdge Ratings.
The September growth was well below the MC poll of 11 economists, which pegged median growth at 6.5 percent, with forecasts ranging from 6.2 to 6.8 percent.
Economists in an MC poll had pegged the full year growth median at 6.8 percent. But a sharper slowdown in the second quarter has increased downside risks.
"A sharper than expected growth slowdown in Q2 has tilted risks to our growth outlook of 6.8% for the current fiscal downwards," said Dharmakirti Joshi, chief economist, Crisil.
The chief economic advisor dismissed concerns surrounding the numbers, pointing that the data was "disappointing, but not alarming", as he blamed geopolitical uncertainties as a factor weighing on growth.
The government has pegged growth at 6.5-7 percent for the year.
In the first half of the year, the economy grew 6 percent slower than 8.2 percent growth recorded in H1FY24. Growth would need to average more than 6.9 percent for the economy to settle at lower end of the government's band.
RBI has predicted growth to average 7.4 percent in the last two quarters of the fiscal.
Hoping for the best
Experts indicate there may be some hope, despite rising global challenges.
"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," said Sinha from CareEdge.
Besides inflation, a revival in spending is also expected to help economy tide over the slow patch.
"In our view, some of the factors dragging down growth in the July-September quarter, ie, rains and slow government spending, will partially reverse in H2. In particular, we expect government spending (both revex and capex) to gain momentum, even though capex may still fall short of the budgeted target," said Shreya Sodhani, Regional Economist, Barclays.
Negative surprises
Gross value added growth was muted at 5.6 percent, with six of the eight sectors underperforming previous quarter.
Mining contracted by 0.1 percent in the second quarter, marking the first deceleration in two years, whereas manufacturing slowed down drastically to 2.2 percent from 7 percent earlier. The decline in electricity was also more pronounced as utilities sector slowed to 3.3 percent from 10.4 percent earlier.
On the demand side, private consumption slowed to 6 percent from 7.4 percent in Q1, despite a favourable base and exports declined to 2.8 percent from 8.6 percent growth in April-June period.
Consumption had witnessed a tepid expansion of 2.6 percent in Q2FY24.
"On the demand side, two domestic demand components namely private final consumption expenditure and gross fixed capital formation together account for a fall of 1.5% points which nearly fully explains the fall in the GDP growth from 6.7% in Q1FY25 to 5.4% in Q2FY25," DK Srivastava, chief policy advisor, EY India.
But the jolt came from investment, measured by gross fixed capital formation. GFCF growth declined to a six quarter low of 5.4 percent. As a ratio of nominal GDP, investments at 30.8 percent were at the lowest level in seven quarters.
"The government’s capex that had been supporting growth so far, saw a moderation, with the Centre and consolidated State capex falling by 15% and 11% respectively in H1. However, the positive aspect is that consumption growth has remained healthy at around 6% in Q2," said Sinha.
Joshi from Crisil notes that "investment growth needs the private corporate sector to take the baton from the government, as the latter pursues trimming its fiscal deficit."
Some positives
Data released on November 29 showed yet another stellar quarter of the farm sector, with agricultural gross value added growing 3.5 percent during the quarter.
Agricultural growth is likely to cross 4 percent in FY25, economists told MC earlier. Agriculture grew at 1.4 percent in FY24.
There was more support from services (ex-utilities) as well, as growth held steady at 7.1 percent, with trade, hotels and communication services showing faster pick-up.
Government consumption, which had slumped due to election period, was also back on track with a 4.4 percent growth compared with -0.2 percent contraction.
RBI quandry
The numbers are likely to make the call on rates tougher for the Monetary Policy Committee, which is expected to meet in the first week of December to decide on the policy rate.
While economists in an MC poll had pegged the probability of a cut to nil, in a recent MC poll, the surprise growth data is likely to weigh on decision, especially as there was a clamour for rate cut from one of the members in the October meeting.
RBI has held the policy rate steady at 6.5 percent for 10 consecutive meetings.
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