Dear Readers,
As we wrap up financial year 2024-25, India’s economy is holding strong, and the government is working hard to keep the momentum going. A few things are playing a key role in this — exports picked up in January, capital expenditure is on the rise, and one of the world's biggest religious gathering, the Mahakumbh, is turning out to be a major boost.
With so many people flocking to the event and spending big in tourism, transportation, and other sectors, this is expected to have a significant impact on the economy. However, global issues and shifting commodity prices could slow things down a bit.
Looking ahead, the government has set a GDP growth target of 6.5% for FY25, which requires an ambitious 7.6% growth in Q4 FY25. Despite a few hurdles, policymakers are confident that India will hit this target as we enter the final stretch.
India’s GDP growth saw a notable uptick to 6.2% in Q3 FY25, up from 5.6% in Q2 FY25. It was a bit slower than expected, but this boost came mainly from stronger private and government spending, and a smaller drag from net exports. However, gross fixed capital formation did dip slightly in Q3.
On the GVA (gross value added) front, things improved slightly to 6.2% in Q3, from 5.8% in Q2. It was lower than the 6.6% we had expected.
The main drivers in Q3 were manufacturing, mining, construction, and PADOS (public administration, defence, and other services), while most other sectors performed better than expected. Do note that these numbers are influenced by the major revisions made to last year’s growth data for FY24.
Here’s an interesting twist: Q1 FY25 GDP was revised down by 20 basis points to 6.5%, while Q2 FY25 got a small upward revision to 5.6%. Considering these updates and the Q3 FY25 performance, the second advance estimate for FY25 suggests a 7.6% growth in Q4.
But we think this could be a bit too high, especially with global uncertainty around exports and commodity prices, which could affect corporate margins. Plus, sectors like electricity and coal didn’t perform as well in January 2025.
Looking forward, CPI inflation for February 2025 is expected to come in at around 4%, which, along with the 6.2% GDP growth in Q3, makes it pretty likely that we’ll see another rate cut in April 2025. Whether a third rate cut comes later in the year will depend on how Q4 FY25 shapes up.
What’s Making The 7.6% Growth Target Realistic in Q4
The massive spending during the Mahakumbh in January and February. Around 50 to 60 crore people attended and spent significantly, which will give the economy a solid boost. This will push up nominal GDP significantly from the expenditure side, according to India’s Chief Economic Advisor V Anantha Nageswaran. He went as far as to say that we could touch $4 trillion in nominal terms by the end of FY25!
Sectoral Breakdown: Services Leading the Way
Q3 data showed broad-based growth driven by both domestic demand and exports, signaling that the economic recovery is well on track. Industrial activity picked up momentum, and the services sector stayed strong, with urban demand improving noticeably.
In fact, fast-moving consumer goods sales volume growth nearly doubled to 5% in Q3 from the previous quarter, reflecting stronger consumer sentiment. Rural demand, which has remained resilient, is expected to keep supporting overall growth too.
India’s Fiscal Position
The country’s fiscal health plays a huge role in determining GDP growth, and India’s fiscal deficit stood at Rs 11.7 trillion (75% of the FY25 target) between April and January. That’s a bit higher than the Rs 11 trillion seen in the same period last year. Net tax revenues grew just 1.3% YoY, mainly due to tax devolution to states. On the flip side, non-tax revenues jumped by about 38%, thanks to the RBI dividend, and revenue expenditure grew by 6.8%. Capital expenditure went up by a modest 5%.
Looking at gross tax collections, they rose by 10.3% YoY in the first 10 months of FY25, mainly driven by stronger income tax collections. Corporate tax collections saw a slight dip (-0.6%), but income tax collections were up 22%.
Net tax revenues grew only 1.3% in the first 10 months of FY25, falling short of the 9.9% growth target for FY25 due to the upfronting of tax devolution to states. However, with a sharp decline expected in tax devolution for February and March 2025, we don’t expect a big miss in net tax revenue collections compared to the FY25 target.
In terms of spending, revenue expenditure rose by 5.1% YoY in January 2025. Meanwhile, capital expenditure surged by around 51%, which is good news for economic activity in the ongoing quarter.
“For the government to meet its capex target of Rs 10.2 trillion for FY25, it needs to ramp up spending by about 15% YoY in February-March 2025, hitting a monthly run rate of Rs 1.3 trillion. A slight miss in capex is possible, but overall, we expect the fiscal deficit to align with the FY25 target of Rs 15.7 trillion (or 4.8% of GDP),” said Aditi Nayar, chief economist at ICRA.
Challenges Ahead
India’s economic outlook looks decent, but there are a few risks on the horizon. One big worry is the global uncertainty, especially with US President Donald Trump’s talk about imposing tariffs on several countries, including India. If he goes ahead with that, it could hurt India’s growth. Another factor to keep an eye on is the monsoon – a good one could help keep food inflation under control, which would boost consumer spending.
Last year’s weak consumption hurt private sector capital expenditure, and for FY26, the government is hoping India Inc. will step up to help drive both employment and consumption, with capex levels set almost the same as FY25.
As for inflation, the RBI is seeing retail inflation at 4.2% for FY26. Here's the quarter-wise projection:
- Q1 FY26: 4.5% (revised down slightly from 4.6%)
- Q2 FY26: 4%
- Q3 FY26: 3.8%
- Q4 FY26: 4.2%
For FY25, inflation is expected to remain at 4.8%.
In a move to support growth, the RBI’s Monetary Policy Committee or MPC cut the repo rate by 25 basis points to 6.25% last month, marking the first rate cut in two years. RBI Governor Sanjay Malhotra confirmed this during the February MPC meeting (Feb 5-7), with unanimous support from all members. Despite the rate cut, the RBI is staying cautious and sticking to a "neutral" stance to balance inflation targets while supporting growth.
Private Sector Activity
India’s Purchasing Managers’ Index (PMI) for January 2025 dropped to 57.7, marking a 14-month low and indicating a slowdown in private sector activity. The services PMI also fell to 56.5, the weakest since November 2022. On the bright side, the manufacturing PMI picked up slightly to 57.7, recovering from a 12-month low of 56.4 in December. A PMI above 50 signals growth, while a reading below 50 means contraction – so things are a bit mixed right now.
Final Thoughts
While there are some risks and uncertainties ahead, the government and RBI are doing what they can to keep things on track. With strong domestic activity, the Mahakumbh boost, and some positive fiscal moves, India’s economic outlook for FY25 remains cautiously optimistic.
Stay tuned, and we’ll keep you updated as things evolve!
As we wrap up financial year 2024-25, India’s economy is holding strong, and the government is working hard to keep the momentum going. A few things are playing a key role in this — exports picked up in January, capital expenditure is on the rise, and one of the world's biggest religious gathering, the Mahakumbh, is turning out to be a major boost.
With so many people flocking to the event and spending big in tourism, transportation, and other sectors, this is expected to have a significant impact on the economy. However, global issues and shifting commodity prices could slow things down a bit.
Looking ahead, the government has set a GDP growth target of 6.5% for FY25, which requires an ambitious 7.6% growth in Q4 FY25. Despite a few hurdles, policymakers are confident that India will hit this target as we enter the final stretch.
India’s GDP growth saw a notable uptick to 6.2% in Q3 FY25, up from 5.6% in Q2 FY25. It was a bit slower than expected, but this boost came mainly from stronger private and government spending, and a smaller drag from net exports. However, gross fixed capital formation did dip slightly in Q3.
On the GVA (gross value added) front, things improved slightly to 6.2% in Q3, from 5.8% in Q2. It was lower than the 6.6% we had expected.
The main drivers in Q3 were manufacturing, mining, construction, and PADOS (public administration, defence, and other services), while most other sectors performed better than expected. Do note that these numbers are influenced by the major revisions made to last year’s growth data for FY24.
Here’s an interesting twist: Q1 FY25 GDP was revised down by 20 basis points to 6.5%, while Q2 FY25 got a small upward revision to 5.6%. Considering these updates and the Q3 FY25 performance, the second advance estimate for FY25 suggests a 7.6% growth in Q4.
But we think this could be a bit too high, especially with global uncertainty around exports and commodity prices, which could affect corporate margins. Plus, sectors like electricity and coal didn’t perform as well in January 2025.
Looking forward, CPI inflation for February 2025 is expected to come in at around 4%, which, along with the 6.2% GDP growth in Q3, makes it pretty likely that we’ll see another rate cut in April 2025. Whether a third rate cut comes later in the year will depend on how Q4 FY25 shapes up.
What’s Making The 7.6% Growth Target Realistic in Q4
The massive spending during the Mahakumbh in January and February. Around 50 to 60 crore people attended and spent significantly, which will give the economy a solid boost. This will push up nominal GDP significantly from the expenditure side, according to India’s Chief Economic Advisor V Anantha Nageswaran. He went as far as to say that we could touch $4 trillion in nominal terms by the end of FY25!
Sectoral Breakdown: Services Leading the Way
Q3 data showed broad-based growth driven by both domestic demand and exports, signaling that the economic recovery is well on track. Industrial activity picked up momentum, and the services sector stayed strong, with urban demand improving noticeably.
In fact, fast-moving consumer goods sales volume growth nearly doubled to 5% in Q3 from the previous quarter, reflecting stronger consumer sentiment. Rural demand, which has remained resilient, is expected to keep supporting overall growth too.
India’s Fiscal Position
The country’s fiscal health plays a huge role in determining GDP growth, and India’s fiscal deficit stood at Rs 11.7 trillion (75% of the FY25 target) between April and January. That’s a bit higher than the Rs 11 trillion seen in the same period last year. Net tax revenues grew just 1.3% YoY, mainly due to tax devolution to states. On the flip side, non-tax revenues jumped by about 38%, thanks to the RBI dividend, and revenue expenditure grew by 6.8%. Capital expenditure went up by a modest 5%.
Looking at gross tax collections, they rose by 10.3% YoY in the first 10 months of FY25, mainly driven by stronger income tax collections. Corporate tax collections saw a slight dip (-0.6%), but income tax collections were up 22%.
Net tax revenues grew only 1.3% in the first 10 months of FY25, falling short of the 9.9% growth target for FY25 due to the upfronting of tax devolution to states. However, with a sharp decline expected in tax devolution for February and March 2025, we don’t expect a big miss in net tax revenue collections compared to the FY25 target.
In terms of spending, revenue expenditure rose by 5.1% YoY in January 2025. Meanwhile, capital expenditure surged by around 51%, which is good news for economic activity in the ongoing quarter.
“For the government to meet its capex target of Rs 10.2 trillion for FY25, it needs to ramp up spending by about 15% YoY in February-March 2025, hitting a monthly run rate of Rs 1.3 trillion. A slight miss in capex is possible, but overall, we expect the fiscal deficit to align with the FY25 target of Rs 15.7 trillion (or 4.8% of GDP),” said Aditi Nayar, chief economist at ICRA.
Challenges Ahead
India’s economic outlook looks decent, but there are a few risks on the horizon. One big worry is the global uncertainty, especially with US President Donald Trump’s talk about imposing tariffs on several countries, including India. If he goes ahead with that, it could hurt India’s growth. Another factor to keep an eye on is the monsoon – a good one could help keep food inflation under control, which would boost consumer spending.
Last year’s weak consumption hurt private sector capital expenditure, and for FY26, the government is hoping India Inc. will step up to help drive both employment and consumption, with capex levels set almost the same as FY25.
As for inflation, the RBI is seeing retail inflation at 4.2% for FY26. Here's the quarter-wise projection:
- Q1 FY26: 4.5% (revised down slightly from 4.6%)
- Q2 FY26: 4%
- Q3 FY26: 3.8%
- Q4 FY26: 4.2%
For FY25, inflation is expected to remain at 4.8%.
In a move to support growth, the RBI’s Monetary Policy Committee or MPC cut the repo rate by 25 basis points to 6.25% last month, marking the first rate cut in two years. RBI Governor Sanjay Malhotra confirmed this during the February MPC meeting (Feb 5-7), with unanimous support from all members. Despite the rate cut, the RBI is staying cautious and sticking to a "neutral" stance to balance inflation targets while supporting growth.
Private Sector Activity
India’s Purchasing Managers’ Index (PMI) for January 2025 dropped to 57.7, marking a 14-month low and indicating a slowdown in private sector activity. The services PMI also fell to 56.5, the weakest since November 2022. On the bright side, the manufacturing PMI picked up slightly to 57.7, recovering from a 12-month low of 56.4 in December. A PMI above 50 signals growth, while a reading below 50 means contraction – so things are a bit mixed right now.
Final Thoughts
While there are some risks and uncertainties ahead, the government and RBI are doing what they can to keep things on track. With strong domestic activity, the Mahakumbh boost, and some positive fiscal moves, India’s economic outlook for FY25 remains cautiously optimistic.
Stay tuned, and we’ll keep you updated as things evolve!
RECOMMENDED FOR YOU
Government To Achieve Fiscal Deficit Target Of 4.4% In FY26: PwC
India-US Trade Deal To Be A Positive Surprise, Economy In 'Envious Spot': Nomura's Sonal Varma
Fitch Ups India's FY'26 GDP Growth Forecast To 7.4% On Better Consumer Spending, GST reforms
India Q2 GDP Preview: Festive Boost, Manufacturing Surge Can Lift FY26 Growth Outlook To 7%, Says Nirmal Bang
POPULAR