First estimate of FY25 real GDP pegs growth sharply lower at 6.4%

8 Jan 2025 , 09:24 AM

YES, YOU CAN CALL IT A GROWTH SHOCKER AT 6.4%

As is the normal practice, the MOSPI published the first advance estimate of full year FY25 GDP growth on January 07, 2025. After reporting strong GDP growth of 8.2% in FY24, the FY25 GDP growth is likely to falter to 6.4%. That is a full 180 basis points lower. While that can be partially attributed to the base effect, the impact on the growth engine cannot be denied. Despite a positive show by agriculture in 2024 and some pressure on the services sector; the fall in GDP growth can be largely attributed to the tepidness in the mining and manufacture segments. But, why has manufacturing slowed down in FY25.

The signals of a slowdown in manufacturing have been around for some time. The Q1FY25 GDP growth has already faltered to 6.7% and the Q2FY25 GDP growth fell further to 5.4%. Amidst rising price levels and static income levels, the purchasing power of the average India has taken a hit. That has impacted urban demand and, to a lesser extent rural demand too. Export demand has also been hit in most products due to weak global appetite and trade disruptions caused by the crisis in the Red Sea. Cost of funds remain high, as the RBI has kept rates steady, even as the Fed has cut rates by 100 bps. Above all, it is slowdown in government capex spending that has been hitting GDP growth real hard.

IS IT TIME FOR THE ALARM BELLS TO START RINGING?

To put it more poetically, it may not yet be time for the Cassandras to come calling, but there are some warning signals for the government. For instance, the GDP growth is on a higher base on the back of consistent growth for the last 3 years. However, it is the sharp deceleration in mining and manufacturing that is a concern. But there are bigger questions that the government may now have to contend with. Has the central bank delayed in cutting rates in India, despite clear signals of weak GDP and the Fed already having cut rates by 100 basis points since September 2024?

The second question is whether the decision to temper capex spending growth was a good decision. In Budget FY25, the government had cut capex spending growth to just 11%, from 30% in the last 2 years. The argument was that the lag effect and private sector participation will fill the gap. Obviously, that has not happened. In FY25, the government has only achieved 46% of its full year capex target till end of November 2024, against 58% in corresponding period last year. This also raises the question on whether 4.9% fiscal deficit can be achieved in FY25. Interesting, the current level of estimated fiscal deficit at ₹16.13 Trillion has already risen to 5% of the reduced nominal GDP.

HOW REAL GVA AND REAL GDP ARE EXPECTED TO SHAPE UP IN FY25

The table below captures the sector wise break up of real GDP (net of inflation). FY23 is the first revised estimate, FY24 is provisional estimate and FY25 is first advance estimate.

Sector	FY23 (₹ in Crore)	FY24 (₹ in Crore)	FY25 (₹ in Crore)	YOY (%) FY24	YOY (%) FY25
Primary Sector	25,87,507	26,42,605	27,39,036	2.1%	3.6%
Agriculture, Livestock, Forestry	22,72,250	23,04,982	23,91,764	1.4%	3.8%
Mining & Quarrying	3,15,256	3,37,623	3,47,271	7.1%	2.9%
Secondary Sector	41,58,893	45,61,936	48,57,103	9.7%	6.5%
Manufacturing	25,04,663	27,51,680	28,98,162	9.9%	5.3%
Electricity, Gas, Utility Services	3,47,973	3,74,174	3,99,781	7.5%	6.8%
Construction	13,06,256	14,36,081	15,59,160	9.9%	8.6%
Tertiary Sector	80,58,501	86,69,210	92,95,056	7.6%	7.2%
Trade, Hotels, Transport	27,77,723	29,55,767	31,28,534	6.4%	5.8%
Financial, Professional Services	34,05,474	36,91,645	39,60,232	8.4%	7.3%
Public Administration, Defence	18,75,304	20,21,798	22,06,290	7.8%	9.1%
Real Gross Value Added (GVA)	1,48,04,901	1,58,73,751	1,68,91,195	7.2%	6.4%
Real Gross Domestic Product (GDP)	1,60,71,429	1,73,81,722	1,84,88,381	8.2%	6.4%

Data Source: MOSPI

Here are some of the key takeaways from the real GDP (net of inflation) for the last 3 years. The last 2 columns show the yoy growth rate.

• The components presented here are for gross value added (GVA). The GVA is the GDP excluding the impact of indirect taxes and subsidies, so it is gives a better picture of output growth. At 6.4%, the FY25 GDP growth is estimated to be 180 bps lower than last fiscal year.
• Agriculture, livestock, and forestry has seen growth bounce from 1.4% to 3.8%. This is thanks to a good monsoon, better acreage and better MSPs for farmers. This year Kharif saw a bumper crop and reservoir levels indicate a robust Rabi cropping season too.
• Mining and manufacturing have taken it on the chin. Real mining output has fallen from 7.1% to 2.9%, while the manufacturing output has fallen from 9.9% to 5.3% in real terms. These are the two items that have been hit by weak demand and have led to a slowdown in GDP growth.
• If you look at the tertiary (services) sector, only the government spending on defence and public expenditure has grown, while key business related services like trade, hotels, transport, financial services, and professional services have all slowed down yoy in real terms.

Of course, there will be the second advance estimate of FY25 GDP on February 28, 2025 and then the actual FY25 GDP growth will be out on the last day of May 2025. It must be remembered that the MOSPI has already factored in more aggressive growth in Q3 and Q4 of FY25.

SOME RELIEF ON THE NOMINAL GDP GROWTH

While real GDP is the gold standard of economic growth, the nominal GDP (pre-inflation) is a good measure of jobs, fiscal deficit ratio and economic activity. Check the table below.

Sector	FY23 (₹ in Crore)	FY24 (₹ in Crore)	FY25 (₹ in Crore)	YOY (%) FY24	YOY (%) FY25
Primary Sector	49,78,870	52,51,104	57,39,114	5.5%	9.3%
Agriculture, Livestock, Forestry	44,84,268	47,25,223	51,99,547	5.4%	10.0%
Mining & Quarrying	4,94,602	5,25,881	5,39,567	6.3%	2.6%
Secondary Sector	63,19,363	68,67,083	73,41,375	8.7%	6.9%
Manufacturing	35,36,461	38,19,749	40,70,762	8.0%	6.6%
Electricity, Gas, Utility Services	6,04,209	6,63,458	6,82,356	9.8%	2.8%
Construction	21,78,693	23,83,877	25,88,257	9.4%	8.6%
Tertiary Sector	1,33,60,808	1,46,43,960	1,61,83,120	9.6%	10.5%
Trade, Hotels, Transport	44,10,148	46,84,542	50,57,475	6.2%	8.0%
Financial, Professional Services	55,20,163	60,64,251	66,86,882	9.9%	10.3%
Public Administration, Defence	34,30,497	38,95,167	44,38,763	13.5%	14.0%
Nominal Gross Value Added (GVA)	2,46,59,041	2,67,62,147	2,92,63,609	8.5%	9.3%
Nominal Gross Domestic Product (GDP)	2,69,49,646	2,95,35,667	3,24,11,406	9.6%	9.7%

Data Source: MOSPI

There are 3 key takeaways from the nominal GDP data. Firstly, despite 180 bps lower real GDP, the nominal GDP in FY25 is actually 10 bps better at 9.7%. However, the growth in nominal GDP is still sharply lower than the 10.5% projected in the Union Budget. Secondly, it means that the inflation impact has been quite strong in FY25; in fact, stronger than in FY24, which is something that also justifies the RBI caution on rates. Thirdly, in terms of nominal growth, the services sector has done better in FY25 than in FY24, showing that it is inflation that has hit the services sector badly.

The data now only presents a dilemma for the policy makers. Growth needs a push, since nominal growth is well below the budget estimates. However, unless inflation is contained, real GDP growth will falter further. Amidst this dilemma, the immediate concern for the government will be that the lower nominal GDP would anyways take the fiscal deficit to 5% of GDP. The question is whether to focus on restraining fiscal deficit or just let it loose for one year to boost growth? A tough call that!