GDP Growth To Take Hit Amid Lacklustre Q4 Capex; Fiscal Deficit Could Undershoot Target

Amid lower capex spending by the centre, GDP growth could take a hit even as fiscal deficit could undershoot the revised target.

The Union government's fiscal deficit reached 85.8% of the budgeted target by the end of the first 11 months of fiscal 2025, according to provisional data released on Friday by the Controller General of Accounts.

Capital expenditure from April to February reached Rs 8.11 lakh crore, accounting for 82.5% of the full-year target, 0.8% higher on an annual basis. While central government capex was at Rs 72,022 crore in January, growing by 51.4% on an annual basis, it was at Rs 54,528 crore in February— 35.4% lower than a year ago. To meet the revised budget target of Rs 10.18 lakh crore for the full fiscal, capex will have to grow by Rs 2.06 lakh crore in March.

Capex is lagging targets by a significant margin unless we see a sharp pick up in spending in March, said Teresa John, lead economist at Nirmal Bang Institutional Equities. For January and February combined — capex is down about 4% on an annual basis. This suggests that capex spending is unlikely to contribute significantly to growth in the fourth quarter and is more likely to act as a drag on growth, John said.

Along with lower central government capex, even at the state government level, capital expenditure is tracking lower in January and February on a year-on-year basis, said Gaura Sengupta, chief economist at IDFC First Bank. Moreover, growth indicators for consumption remain mixed with weakness in urban demand, she added. "As such, we expect FY25 GDP growth to undershoot advance estimate. Our estimate is tracking at 6.3% vs advance estimate of 6.5%," Sengupta said.

Aditi Nayar, chief economist at ICRA, expects capex to modestly undershoot target as per the revised budget. However, this would offset the miss on the disinvestment front, as well as any overshooting in the revex, she explained.

Overall, ICRA expects the fiscal deficit to print largely in line with the absolute FY25 RE of Rs 15.7 lakh crore. Interestingly, the National Statistics Office has pegged the nominal GDP at Rs 331 lakh crore, as per its Second Advance Estimate for FY25, which is 2.1% higher than the First Advance Estimate of Rs 324.1 lakh crore that was used in the Union Budget. This implies that the fiscal deficit will be contained at 4.7% of GDP in FY25, lower than the revised estimate of 4.8% for the fiscal. 

John also said that while lower capex spending will be a drag on growth, the fiscal deficit will likely be below 4.8% of GDP in FY25.

Finance Minister Nirmala Sitharaman, in her Budget 2025 speech on Feb. 1, set a revised fiscal deficit target of 4.8% of GDP for the ongoing fiscal, compared to the budget estimate of 4.9% in July as part of its fiscal consolidation efforts.