January 2025
India’s economy is forecast to expand by a lower-than-expected 6.4% in FY 25, the slowest in four years, with tepid manufacturing and lower investments pulling down growth, as per data released by NSO (National Satistical Office).
India’s capex declined by 12.3% year-on-year during April-Novemenber 2024 due to general elections in the 1st quarter and heavy rains subsequently. Capex accounted for 46.2% of the annual target of INR 11.1 lakh crore in Apr-Nov compared to 58.5% in the corresponding period last year.
Q2 estimates show the economy grew at a significantly lower rate 5.4%, the lowest in seven quarters, much lower than RBI’s October estimate of 7%.
GVA (Gross value Added) growth dropped to 5.6% in the second quarter, also a seven-quarter low.
The seeds of moderation in urban demand were sown in the 2nd half of 2023-24, with a slowdown in urban wage growth. Except agriculture and trade and hotels, every sector grew at a slower pace in Q2 than in Q1. Manufacturing growth fell to a dismal 2.2% from 7% in Q1.
Agricultural growth was at 3.5%, up from 2% and the above normal monsoon rain and higher sowing than last year has improved the outlook for output that could bring food prices down.
Services sector held steady at 7.1%. Services sector growth is expected to remain resilient, driven by rural recovery and support to purchasing power from government spending.
One of the main culprits for lower Q2 growth is sharply lower government capex. This coupled with failure of corporates to invest and slowing private consumption expenditure seem to have pulled down Q2 growth.
India’s seven-quarter low GDP growth of 5.4% also weighed on the local currency apart from US president-elect Trump’s threat to slap 100% tariffs on BRIC countries, of which India is a part, if the bloc sought to use an alternative currency to the greenback for bilateral trades.
Rupee depreciation will increase imported inflation and hence RBI weighs currency management with reserves. As the dollar strengthens and Fed slows on rate cuts, FPI are also affected.
As per RBI, a 5% depreciation of rupee from baseline assumption will add 35 basis points to headline inflation. India’s retail inflation or CPI stood at 5.48% in Nov 2024 as compared with 6.21% in October 2024.
Meanwhile CPI hit a 14-month high of 6.21% in October surpassing RBI’s target range of 4-6%. The increase was driven by rising food inflation of 10.87%. food prices carry about 46% weight on the country’s CPI.
Inflation is already biting into urban consumption demand, corporates’ earnings and capex.
GDP growth rate is expected to pick up in the second half, supported by increased government capex. Rural consumption is also expected to continue the growth momentum supported by healthy agricultural production.
The overhang on growth from employment scenario in rural and urban areas, and regulatory measures-led personal credit slowdown will likely continue. The ongoing global uncertainty is weighing in, impacting overall consumption and tax collection (GST). Corporate earnings are also getting downgraded and sales are faltering.