Moneycontrol Pro Weekender | GDP Growth: Strong, Weak, or Just a Data Revision Away?

Growth of 6.5 percent on a much larger base is not the same as growth on a lower base—it signals an economy that’s significantly stronger than previously believed

Dear Reader,

Real GDP growth for FY25, according to the Second Advance Estimates released on Friday, stands at 6.5 percent. Not too different from the 6.4 percent projected in the First Advance Estimate back in January, right? But hold on. The story gets interesting when you dig into the revisions.

The First Advance Estimate of 6.4 percent was based on an 8.2 percent GDP growth in FY24. But now, surprise! The FY24 growth figure has been revised up to a massive 9.2 percent. That changes the entire picture. Growth of 6.5 percent on a much larger base is not the same as growth on a lower base—it signals an economy that’s significantly stronger than previously believed. The real GDP estimate for FY25 now stands at Rs 187.95 lakh crore, up from Rs 184.88 lakh crore in the first estimate.

The simple point is: If the revisions in the growth numbers can be so large, what exactly is the point of taking a microscope to analyse the data? They may well be changed by another percentage point or so at the time of the next revision.

The revision in FY24 GDP growth makes the slowdown look even starker—It’s a sharp drop from 9.2 percent to 6.5 percent.

It’s the same story with Gross Value Added (GVA), but the revisions are even bigger. Initially pegged at 7.2 percent for FY24, GVA growth has now been revised up to 8.6 percent. For FY25, while the forecast remains at 6.4 percent growth, the absolute number has increased—now standing at Rs 171.79 lakh crore, compared to Rs 168.91 lakh crore earlier.

The GDP numbers for Q3 FY25 were eagerly awaited, since they would offer insights into the strength of the recovery from Q2’s slump. Initially, year-on-year real GDP growth in Q2 was pegged at 5.4 percent, based on an 8.1 percent growth in Q2 FY24. But the revised figures now show that Q2 FY25 wasn’t as bad—growth has been upgraded to 5.6 percent, and on a higher base of 9.3 percent in Q2 FY24.

Q3 GDP growth, meanwhile, is estimated at 6.2 percent. That’s a decent recovery, but not a roaring one. Is the real game-changer the implied growth for Q4 FY25, projected at a robust 7.6 percent? But before you pop the champagne, note that this jump is largely because of changes in taxes and subsidies. The GVA growth story is more grounded—rising from 6.2 percent in Q3 to 6.8 percent in Q4. The one-percentage-point recovery from Q2’s low of 5.8 percent signals a substantial rebound.

Looking deeper into sectoral revisions for FY25, agricultural growth has been revised up while manufacturing has been marked down. Construction growth remains steady, and the ‘trade, hotels, transport, etc.’ category has been revised higher. On the expenditure side, consumption growth estimates have been revised up while gross fixed capital formation has been revised down. But take these expenditure-side numbers with a fistful of salt—FY25’s ‘Discrepancies’ figure is a massive negative Rs 2.24 lakh crore. And if you think these iron out over time, think again—FY23 still shows a negative Rs 5.19 lakh crore.

These numbers, however, are yesterday’s story. What about the future? Uncertainty looms large. Donald Trump has promised to impose reciprocal tariffs from April 2—What happens to India’s exports then? If our import tariffs drop, will Indian businesses withstand the increased competition? The IMF warns that if FDI between geopolitical blocs falls by 50 percent, India’s GDP could shrink by 0.7 percent. If global trade fractures into two separate high-tech and energy blocs, India’s GDP loss jumps to 1.5 percent. And in the worst-case scenario, where additional non-tariff barriers arise, the loss could be a staggering 3.3 percent.

Then there’s the weather. The Indian Meteorological Department is already warning of record-breaking heat in March, spelling trouble for the wheat crop. Monsoon unpredictability adds to the uncertainty.

Meanwhile, AI-driven job cuts in the software industry are becoming a reality. The IMF report suggests AI will boost earnings and productivity in 14 percent of Indian jobs, but put 12 percent of workers at high risk of displacement. Another layer of unpredictability.

The markets, priced for strong growth, are now starting to factor in these risks. But with the fall in the markets, the wealth effect too starts operating in reverse, impacting growth in the real economy.

Not surprisingly, businesses are playing it safe. The IMF notes that ‘economic policy uncertainty can be a drag on investment’, leading to fewer new projects and more cancellations. That could explain why private investment remains subdued.

The IMF has pegged India’s GDP growth at 6.5 percent for both FY25 and FY26, but more importantly it says that is the country’s potential growth rate. For most economies, such growth would be a dream. But as the Economic Survey points out, it’s simply not good enough for India’s drive to become a developed economy by 2047.

The final question is: Why has growth fallen from 9.2 percent in FY24 to 6.5 percent this year? Could it be that the strong growth seen post-pandemic was because of huge government support? And now that the fiscal deficits are being pruned, 6.5 percent is India’s normal rate of growth?

Or will FY25 growth too be revised up next year?

Cheers,

Manas Chakravarty

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