GDP and GVA growth likely at 6.2%, with risks evenly balanced
Indranil Pan, Deepthi Mathew & Khushi Vakharia
Economics Knowledge Banking
YES Bank
Mumbai, 30 November, 2024:
India GDP: H2 can be better than H1
India’s real GDP moderated to 5.4% YoY in Q2FY25 (Q1FY25:6.7% YoY), while real
GVA came at 5.6% YoY (Q1FY25: 6.8% YoY). From the GVA side, manufactuing sector
growth showed a significant moderation, mining sector registered a negative growth
while the services sector maintained a relatively steady growth. On the expenditure
side, private consumption moderated to 6.0% YoY. The worry comes from Gross fixed
capital formation, growing at 5.4% YoY, down from a 7.5% in the previous quarter.
After today’s print, we expect GDP and GVA growth likely at 6.2%, with risks evenly
balanced.
GVA takes a hit in Q2FY25: India’s GVA grew by 5.6% YoY a moderation from 6.8%
YoY in Q1FY25. The industry sector moderated to 3.8% YoY in Q2FY25 from 8.3% YoY
in the previous quarter. Within the industry sector, manufacturing came in lower at 2.2%
YoY in Q2FY25 (vs 7.0% YoY Q1FY25), ‘mining’ declined by 0.1% YoY whereas
‘electricity’ registered a growth of 3.3% YoY (10.4% YoY in Q1FY25). The construction
sector grew by 7.7% YoY vs 10.5% YoY in Q1FY25. The agriculture sector registered
growth of 3.5% YoY (vs 2.0% YoY in Q1FY25). One reason for the poor growth in
manufacturing and mining in Q2 could be the excess rain in the period.
Services sector growth remains steady:
Services sector grew by 7.1% YoY, marginally lower from the earlier 7.2% YoY.
On a QoQ basis, the services sector grew by 4.1% vs 3.5% in Q1FY25. Contact
intensive services, in particular trade, hotels, transport, and communications registered
a growth of 6.0% YoY vs 5.7% YoY in the previous quarter.
On a QoQ basis, it registered an uptick of 10%. Financial services and real estate grew
by 6.7%, lower than 7.1% YoY in Q1FY25 and declined by -0.8% on a QoQ basis. Public
administration & defense grew by 9.2% YoY (6.8% QoQ).
Private consumption remains flat in Q2FY25:
India’s GDP grew by 5.4% YoY in Q2FY25, much lower than the previous quarter (6.7% YoY).
Private consumption expenditure grew by 6.0% YoY vs 7.4% YoY in Q1FY25 and registered a
QoQ growth of only 1.0%. The hit to the private consumption growth was likely due to the “Pitru-
paksh” period and rains. Further, the RBI had raised the risk-weights on unsecured
loans, that led to the unsecured loan growth slowing sharply and leading to a slowdown
in consumption. Government consumption grew by 4.4% YoY from a decline of 0.2%
YoY. However, the worry comes from Gross Fixed Capital Formation (GFCF) or the
investment demand that expanded by 5.4% YoY, lower than 7.5% YoY growth in the
previous quarter, accounting for a share of 34.3% in GDP. GFCF was seen to contract on
a QoQ basis. Net exports came to (-) INR 903 bn vs (-) INR 2041 bn in Q1FY25. Exports
of goods and services grew by 2.8% YoY in Q2FY25, sharply lower than 8.7% YoY in the
earlier quarter. Imports fell by -2.9% YoY vs (+) 4.4% YoY in the previous quarter. Net
taxes grew by 2.7% YoY vs 4.1% YoY in the previous quarter.
GDP growth revised lower to 6.2% YoY in FY25:
We see H2FY25 growth to be better than in H1FY25. Q3FY25 could see a bounce as it
encompasses the festive season and wedding season demand. Thus, stabilization of growth
is likely to be led by the private consumption demand. On the other hand, the worry could be
on the capex side. There has been a lull in government spending in H1FY25 and capex
spending is expected to show some improvement in H2FY25. However, with capex spending registering
a de-growth 15% in FY25TD, it looks difficult for the central government to achieve the
budget target in FY25. To achieve the target of INR 11.1 tn, central government would
be required to spend an average of INR 1.3 tn every month for the rest of the financial
year, which looks ambitious. From the production side, the manufacturing sector
growth could remain on a slow track as we look ahead to risks of higher input costs on
account of Trump tariffs. As per the PMI data, the manufacturing sector is witnessing
an uptick in the input prices, putting pressure on the margin growth of the companies.
A pickup in economic activities is expected in Q3FY25 as is also predicted by the high
frequency data that we see. 2W sales, PV sales, PMIs registered improvement in October.
On the other hand, demand for labor under the MNREGS has picked up in October.
Headwinds to consumption power come from weak real wage growth in both rural and
urban segments. This poses significant risk as the focus turns to the rural sector for
supporting growth given the moderation in urban demand. Overall, we see FY25 GDP
growth at 6.2% YoY.
