Although this marks the slowest growth rate in the past five quarters, the Indian economy demonstrated significant resilience, particularly during the national elections.

India’s GDP grew by 6.7% year-on-year in the first quarter of FY2025 (April-June quarter of FY 2024-25), aligning closely with projections of 6.5% to 6.7%. Although this marks the slowest growth rate in the past five quarters, the Indian economy demonstrated significant resilience, particularly during the national elections. Despite the uncertainties typically associated with election cycles, the economy’s underlying strength was evident. 

From an expenditure perspective, the Indian economy remained robust, supported by strong private consumption growth. Private consumption surged by 7.4% in Q1 FY2025, marking a seven-quarter high. This recovery in consumption was particularly noticeable in the rural economy, where easing inflation and improved farm output played crucial roles. Strong rural demand is likely to provide a much-needed consumption boost.

Investment spending, measured by gross fixed capital formation, also performed well, growing by 7.5% during the quarter. This strong investment performance is noteworthy, given the election-related uncertainties, modest corporate profits, and the significant repatriation of income from foreign capital flows. The steady pace of investments reflects confidence in the long-term potential of the Indian economy, even in the face of temporary political uncertainties.

Trade Performance: Export Growth and Shifting Trends

India’s exports grew by 8.7% in Q1 FY2025, driven primarily by robust services exports. Although goods exports saw a mixed performance, with certain segments such as gems and jewelry experiencing contractions, the overall export landscape remained positive. Notably, strong exports in machinery and electronics goods indicate a shift in India’s export basket towards higher-value goods. This trend is a positive signal of the country’s evolving industrial capabilities.

There was a significant slowdown on the import front, with imports growing by just 4.1% compared to 8.3% in the previous quarter. This import decline contributed to a positive net trade balance, bolstering the overall GDP growth and supporting economic resilience during this period.

Manufacturing and construction led the way

Gross Value Added (GVA) growth increased to 6.8% in Q1 FY2025, up from 6.3% in the previous quarter. This improvement was primarily driven by stronger-than-expected manufacturing activity, which grew by 7%. Given that the industrial production index growth between April and June had indicated more modest manufacturing activity, this outcome was particularly encouraging. This also suggests that the IIP, which is indexed to 2011-12, may not accurately reflect the current state of manufacturing. India has advanced into high-value manufacturing sectors, like semiconductors and machinery, and the outdated indexation may not capture activities in these emerging industries.

The construction sector also posted robust growth of 10.5%, reflecting ongoing infrastructure spending. After three consecutive quarters of weak performance, the agriculture sector showed signs of recovery, with growth rebounding to 2%. This recovery is expected to gain momentum as India has received good rainfall this monsoon. This would support rural demand and overall consumption in the lead-up to the festive season.

A noteworthy development in this quarter was the convergence of GDP and GVA growth rates. In the previous two quarters, there had been a significant discrepancy of around 1.5% between these two measures, raising concerns about the balance between demand and supply in the economy. The reduced gap in Q1 FY2025 suggests that the demand and supply sides of the economy are moving towards equilibrium, which could help ease inflationary pressures and enhance consumer purchasing power in the coming months.

Optimism on the Horizon

The outlook for India’s economic growth in the coming quarters is positive. The festive season is expected to drive a further increase in consumption spending, supported by falling inflation, improved farm income, and a stable policy environment. This boost in consumer demand is likely to improve investment sentiments as well.

Manufacturing capacity utilisation has reached its highest level in 11 years at 76.8%, and strengthening order books suggest that private investments will continue to rise. Additionally, the government’s reduced capital expenditure during the election period is expected to be compensated for in the latter half of the year, further boosting the economy.

As the US elections conclude later this year and with the possibility of the US Federal Reserve reducing policy rates (as indicated in the Jackson Hole Symposium last week), India could see increased capital inflows, translating into long-term investment opportunities. With these factors in play, India’s GDP growth is projected to range between 7.0% and 7.2% for the full fiscal year, reinforcing the country’s economic resilience and potential for sustained growth.

Source: financialexpress