September-December GDP growth rate offers relief, but falls short of expectation

GDP data

The Q3 FY2025 GDP growth print was eagerly awaited, to confirm that the worst is over, and that the pace of economic expansion would improve from the lower-than-expected print seen in Q2 FY2025. The data released by the National Statistics Office (NSO) has borne out that India’s growth outcomes have improved, but to a milder extent than anticipated.

The NSO has estimated GDP growth at 6.2% for Q3 FY2025, which is a tad below our forecast of 6.4%. Simultaneously, the Q2 FY2025 GDP rise has been revised up to 5.6% from the initial 5.4%. As a result, the extent of the improvement between these two quarters is limited to 60 bps, as opposed to the hope of 100 bps.

Incidentally, the Q1 FY2025 GDP growth has been marked down, to 6.5% from 6.7%, resulting in the H1 numbers being unchanged at 6.0%. Notably, the Q3 print remains 37 bps below that for Q1 (6.2% vs 6.5%). This is taking some sheen off the sequential upturn that has set in.

What did drive this year-on-year (YoY) upturn in Q3 relative to Q2? In terms of the expenditure aggregates, the pickup in GDP growth was driven by private and government consumption expenditure as well as exports, whereas the pace of growth in investment dipped slightly.

Interestingly, on the gross value added (GVA) side only construction growth slipped between these two quarters, from a fairly high level; all the other sub-sectors recorded an improvement or maintained their pace of growth.

Is the FY25 growth estimate a bit optimistic?

Moreover, the NSO has released the Second Advance Estimate for FY2025 GDP growth, which is placed at 6.5%, a shade higher than the First Advance Estimate of 6.4%. Based on the current growth trends for 9M FY2025, the SAE of 6.5% for FY2025 implies that the NSO expects GDP to expand by a sharp 7.6% in Q4 FY2025. This is driven by a growth of nearly 10% in private consumption expenditure, which seems somewhat implausible despite the transient uptick provided by events such as Mahakumbh and Coldplay concerts.

Given factors such as tepid merchandise exports and pressure on margins in some sectors, we project India’s Q4 GDP growth in a range of ~6.5-6.9%, benefitting from Government spending and rural consumption. Consequently, for the full-year FY2025, we project the GDP growth at 6.3%, as against the SAE of 6.5%.

In the current global context, a 6.3% or 6.5% GDP expansion is certainly enviable. However, this entails a very sharp step down from the NSO’s revised growth of 7.6% for FY2023 (up from 7.0%) and a stupendous 9.2% for FY2024 (up from 8.2%).

The obvious explanation for the growth slowdown in FY2025 vs FY2024 is the delay in government spending related to the Parliamentary elections and disruptions related to the heatwave in Q1 and excess rains in Q2. However, when we compare disaggregated growth in FY2025 vs FY2024, to understand the underpinnings of the slowdown, some curious trends emerge.

A slowdown in investment is a drag on economic growth

The slowdown is led by government final consumption expenditure (GFCE) to 3.8% in FY2025 from 8.1% in FY2024, and gross capital formation (GCF) to 5.8% from 10.5%, respectively. However, the expansion in private final consumption expenditure (PFCE), the mainstay of India’s economy, is set to rise to 7.6% from 5.6%. Moreover, the drag from net exports is set to ease sharply.

It’s the dreaded discrepancy figure that is set to reverse sharply between FY2023, FY2024 and FY2025. Discrepancies refers to the residual that is left after the GDP data is classified into the major components, i.e. PFCE, GFCE, GCF and net exports, in a sense representing what can’t be classified as yet based on the data that is available. This figure in real terms, is moving from (-)Rs. 5.2 trillion in FY2023 to (+) Rs. 1.5 trillion in FY2024, and then reversing back to (-)Rs. 2.2 trillion in FY2025. Further revision in the FY2024 and 9M FY2025 figures remain a distinct possibility.

Looking ahead, our early estimates place GDP growth at 6.5% in FY2026, assuming a normal monsoon and another 25-50 bps of repo rate cuts. The GoI has provided an equivalent thrust towards capital spending and consumption via the tax relief proposed in the Union Budget for FY2026. However, global uncertainty remains high, especially related to tariffs and trade policies, which could exert a downside risk to our baseline estimates for India’s GDP growth.