ICRA Expects India's GDP Growth Rate At Six-Decade Low Of 6% In First Quarter Of FY25; Here's Why!

India's GDP growth is likely to slow down in the first quarter of FY25, and in ICRA's view the pullback is seen to be at six-decade low. That being said, the leading rating agency is projecting the year-on-year (YoY) expansion of the GDP to moderate to six-quarter low of 6.0% in Q1 FY2025 from 7.8% in Q4 FY2024, amidst a contraction in Government capital expenditure and a dip in urban consumer confidence.

Aditi Nayar, Chief Economist, Head-Research & Outreach, ICRA said: "Q1 FY2025 saw a temporary lull in activity in some sectors related to the Parliamentary elections and sluggish Government capex, both for the Centre and the states. Further, urban consumer confidence reported a surprising downtick in the May 2024 (and July 2024) rounds of the Central Bank's Consumer Confidence Survey, while the lingering impact of last year's unfavourable monsoon and an uneven start to the 2024 monsoon prevented a broader improvement in rural sentiment."

Nayar added, "Lower volume growth combined with diminishing gains from commodity prices weighed upon the profitability of some of the industrial sectors. The heat wave also affected footfalls in various services sectors, even as it provided a significant boost to electricity demand. On balance, we foresee a transient moderation in India's GVA and GDP growth in Q1 FY2025 to 5.7% and 6.0%, respectively."

Further, Nayar said, for the full-year FY2025, ICRA expects a back-ended pick-up in economic activity to boost the GDP and GVA growth to 6.8% and 6.5%, respectively. In particular, there is considerable headroom for the GoI's capital expenditure, which needs to expand by 39% in YoY terms in July-March FY2025 to meet the Budget Estimate for the full year. This is expected to catapult GDP growth back above 7% in H2 FY2025.

As per ICRA, the gap between the GDP and the GVA growth is likely to moderate to ~30 basis points (bps) in Q1 FY2025 from 148 bps in the previous quarter. This is on account of an expected lower expansion in the net indirect taxes in Q1 owing to a turnaround in the subsidy outgo of the Government of India (GoI; +3.6% in Q1; -24.2% in Q4 FY2024).

The rating agency also estimates the industrial GVA growth to record a moderation to 6.4% in Q1 FY2025 from 8.4% in Q4 FY2024, led by manufacturing (to +7.0% from +8.9%) and construction (to +4.0% from +8.7%). In contrast, electricity (to +11.0% from +7.7%), and mining and quarrying (to +6.5% from +4.3%) are projected to record an uptick in growth.

Also, ICRA forecasts the YoY expansion in the services GVA to ease slightly to 6.5% in Q1 FY2025 from 6.7% in Q4 FY2024, amidst a decidedly mixed trend in the high frequency indicators. The performance of half of the 14 indicators tracked by ICRA saw a deterioration in Q1 FY2025 relative to Q4 FY2024, which can partly be attributed to the heatwave conditions that dampened mobility/travel. These include air cargo traffic, rail freight, consumption of petrol and diesel, GST e-way bills, domestic airlines' passenger traffic, and CP volumes.

In contrast, seven indicators improved on a YoY basis in Q1 FY2025, largely related to public spending, transport, communication and exports. These include non-interest revenue spending of the GoI and aforesaid 22 state governments, CV sales (aided by a favourable base), service sector exports, ATF consumption, ports cargo traffic and telephone subscribers, it said.

Lastly, ICRA added, amidst a decline in the output of most rabi and summer crops and a deficient rainfall seen in June 2024, ICRA expects the GVA growth of agriculture, forestry and fishing to print at 1.0% in Q1 FY2025.