Investment rate likely declined to 30.1% in FY25, a three-year low, but consumption and agri outperform pre-pandemic levels: MC Analysis

India's Fy25 growth was likely driven by consumption, agriculture and services

India’s investment rate likely declined to a three-year low of 30.1 percent of GDP in 2024-25 compared with 30.8 percent in the previous fiscal, as the government’s capex spending slowed during the year, according to data released on January 7.

The investment rate, calculated in nominal terms, was even lower than the pre-pandemic average of 30.2 percent and was one of the contributing factors to the decline in growth to a four-year low, said experts.

As per the first advanced estimates, India’s economy slowed to 6.4 percent compared with the 8.2 percent growth registered the previous year.

“The decline in government capital expenditure, a key driver of post-pandemic recovery, during the second quarter is unlikely to be compensated for in the rest of the fiscal. Further, private sector investment remains sluggish despite favourable conditions.  Little surprise, therefore, that investment growth slowed to 6.4 percent this fiscal from 9.0 percent in the previous one,” said Dharmakirti Joshi, chief economist, Crisil.

The 6.4 percent estimate is lower than RBI’s projection of 6.6 percent and a tad below the lower threshold of the government’s 6.5-7 percent projection.

However, investment was not the only factor to blame for slowing growth, as the manufacturing sector is also expected to underperform.

Manufacturing’s share has stood below 16 percent of the GDP for the last three years.

MC analysis shows that the manufacturing growth, estimated at 5.3 percent, in FY25 was lower than the 13-year average of 5.8 percent and the pre-pandemic average of 6.2 percent.

On the other hand, the agricultural sector is set to grow at 3.8 percent in FY25 compared with 1.4 percent in the previous year and a long-term average of 3.7 percent.

Similarly, consumption growth likely increased to 7.3 percent from a paltry 4 percent in the previous year.

Consumption growth has averaged 6 percent since the start of the series and 6.7 percent before the pandemic.

“On the consumption front, Private Final Consumption Expenditure has seen a notable pickup, growing by 7.3% in FY 2024-25, compared to 4.0% in the previous year. We believe this is largely driven by higher rural demand as urban demand has been lower than expectations amidst higher interest rates and a slowdown in retail loans, ” said Suman Chowdhury, Chief Economist and Executive Director, Acuité Ratings & Research.

Services are also expected to hold steady as the tertiary sector’s share in the economy rises back above 50 percent. The sector’s performance expected at 7.2 percent was only slightly lower than the previous year’s growth rate of 7.6 percent.