Economists Trim India GDP Growth Forecast Despite Expectations Of A Bounce Back

India's GDP for Q2FY25 grew at the slowest pace in seven quarters, prompting economists to lower their forecasts for the full year, despite expectations of a recovery in the second half of the fiscal.

Gross domestic product grew 5.4% in the July-September quarter, led by slower growth across the industrial sector and compared to 6.7% in the April-June quarter, according to the latest estimates released by the government's statistical office on Friday. Gross Value Added, which strips out indirect tax and subsidies, is estimated to have grown 5.6%, compared to 6.8% in the preceding quarter.

Alongside slower growth in industrial GVA led by manufacturing, private consumption and capex saw slower growth compared to the first quarter as per expenditure wise trends.

While the quantum of the undershoot was a surprise, the trajectory of slowing growth in recent quarters is not, stated a research note by JPMorgan. "We have long argued that growth last fiscal was boosted by statistical artifacts surrounding deflators and subsidies and that underlying growth was much more tepid," Sajjid Z Chinoy, Chief India Economist at JPMorgan stated. That is the reason 2024-25 growth (a year when the statistical supports were expected to fade) was pegged at 6.5% when most other estimates were at 7%, the note explained. In the event, this dynamic has combined with a cyclical slowing in recent quarters and even though the 5.4% print represents the quarterly growth trough, full-year growth is now expected lower at about 6.4%, according to JPMorgan's latest forecast.

The gap between GDP at 5.4% and GVA at 5.6% growth has remained negative and this trend may continue as subsidies growth is likely to exceed that of indirect taxes, explained Madhavi Arora, lead economist at Emkay. Tepid nominal GDP growth so far at 8.9% for the first half of the fiscal, implies more than 12% growth needed in H2 to match budgeted estimate of 10.5%, said Arora. While H2FY25 will see sequential pick-up in public spending, both on revex and capex, it needs to be seen if general government capex will be able to hit budgeted targets, she added.

"We see urban consumption staying pale ahead owing to weaker incomes, even as we believe that the pick-up in rural consumption is only cyclical," Arora said, revising down the GDP forecast by 50 basis points to 6% from 6.5% earlier, citing slowing manufacturing, and a not-too-exciting consumption story.

Cyclical headwinds loom in the form of pressured corporate margins amid fading input cost benefits, tighter lending standards, weaker exports, and mildly slower GoI net spending growth for FY25, despite increasing populist measures across the Centre and states in H2, she cautioned.

We now lower our FY24-25 growth forecast to 6.5% year-on-year from 6.8%, said Shreya Sodhani and Amruta Ghare, economists at Barclays. However, as we detailed in India - looking through the cyclical slowdown, we think this growth slowdown is likely to be short term.  While high-frequency data for economic activity reflect some improvement in festival-loaded Q4 24 vs Q3, the data signals are mixed at best. 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. Additionally, urban demand may take some time to recover, while exports could be at the mercy of global trade tensions.

A strong bounce back is expected in H2 driven by government spending, pick up in capex, strong investment and revival in consumption demand-both urban and rural, stated a research note by Jahnavi Prabhakar, Economist, Bank of Baroda.

Agriculture growth is expected to clock robust growth in the same period, she said, adding that the evolving global growth dynamics and any impact on global trade due to tariff imposition by US remains a downside risk to the projections. "Based on the above, we expect the Indian economy to clock a growth rate of 6.6-6.8% in FY25," she said.