FinMin: Q3 GDP Growth Brighter, But Elevated Stock Markets Continue To Pose Big Risk In FY26

India's GDP growth looks brighter in Q3 of FY25, as per the latest monthly economic review report released by the Finance Ministry on December 26. The ministry believes industrial activity is poised to gain traction, while rural demand remains resilient. Furthermore, the ministry's report expects far food price pressures to ease owing to optimism in the farm sector outlook. However, newer uncertainties have emerged in FY26, and the ministry believes elevated stocks pose a big risk.

Key Highlights of the Monthly Economic Review For November 2024, as per Finance Ministry are:

- India's real GDP surged by 5.4% in Q2FY25, leading to a 6% growth in H1 of FY25.

- Early signs of a rebound in capital information are evident in H2FY25, with the Union Government's Capex on the rise.

- Also, in Q2FY25, the agricultural growth was aided by robust kharif production, favourable monsoon conditions, and sufficient reservoir levels.

- Inflation pressures have also eased to 5.5% in November 2024, due to a decline in food and core inflation.

- Furthermore, lower international crude oil prices positively impacted domestic inflation, though the report believes high global edible oil prices remain a risk.

- Additionally, the country's foreign exchange reserves surged by $6.4 billion in FY25 till December 13, 2024, driven by stable capital inflows.

Looking ahead, the FinMin said, "After a moderation in Q2 of FY25, the outlook for Q3 appears bright, as reflected in the performance of HFIs for October and November 2024. An increase in Minimum Support Price (MSP) for rabi crops, high reservoir level and adequate fertiliser availability bodes well for rabi sowing. Industrial activity is likely to gain traction. The October and November 2024 PMI remained firmly in the expansionary range, supported by new business growth, strong
demand, and advertising efforts."

The conclusion of the monsoon season and the expected increase in government capital expenditure are expected to support the cement, iron, steel, mining, and electricity sectors. Additionally, the services sector continues to perform well, with PMI services being in an expansionary zone in October and November 2024, as per the report.

However, FinMin believes many major economies' global uncertainties and aggressive policies threaten domestic growth.

Rural demand has remained resilient with 23.2% growth in two and three-wheeler sales, coupled with a growth of 9.8% in domestic tractor sales from October - November 2024.

Additionally, the urban demand growth stood at 13.4% for sales of passenger vehicles. Air passenger traffic growth has also been robust. Meanwhile, the RBI's consumer confidence survey signalled consumer optimism regarding the general economic situation, employment, and prices in the year ahead.

In regards to RBI's CPI inflation target of 4.8% for FY25, the FinMin said, the farm sector outlook is optimistic, generating hopes that food price pressures will decline gradually.

Hence, the ministry's report added there are good reasons to believe that the outlook for growth in H2 of FY25 is better than what we have seen in H1. At the same time, the possibility that structural factors may also have contributed to the slowdown in H1 should not be ruled out.

A combination of monetary policy stance and macroprudential measures by the central bank may have contributed to the demand slowdown. It is good news that the central bank lowered the cash reserve ratio from 4.5 per cent to 4 per cent in its policy meeting in December 2024. That should help boost credit growth, which has slowed a little too much and quickly in FY25, it said.

For FY26, FinMin said, "Newer uncertainties have emerged. Global trade growth is looking more uncertain than before. Elevated stock markets continue to pose a big risk."

Finally, it said, "The strength of the US dollar and a rethink on the path of policy rates in the United States have put emerging market currencies under pressure. In turn, that will make monetary policymakers in these countries think more deeply about the path of policy rates. Recent exchange rate movements may have lowered their degrees of freedom. In sum, sustaining growth will require a deeper commitment from all economic stakeholders to growth."