India Q1-FY25 GDP tapers to 6.7%, but nominal GDP growth higher

2 Sep 2024 , 02:26 PM

INDIA’S Q1FY25 GDP GROWTH LOWER, BUT STILL GOOD ENOUGH

After being the fastest growing large economy in the world in FY23 and FY24; there were already hopes building up that the growth could taper in FY25. However, while the Q1FY25 GDP relatively disappointed at 6.7%, it was not all that embarrassing. In FY24, the GDP had grown at over 8% for 3 quarters and at 7.6% in the fourth quarter, giving a full year GDP growth of nearly 8%. However, that was going to be hard to sustain on a higher base. Secondly, the first quarter of the fiscal has traditionally been a weak month in terms of growth, and this year, the first quarter problems got compounded by the prolonged economic uncertainty and spending freeze during the general elections period.

The first quarter of any year normally has a higher seasonal component. In this year, apart from the delayed start to the monsoons, the election period uncertainty also hit the services sector. While the slowing of agricultural output in the quarter was understandable due to the monsoon uncertainty, there was visible slowdown in the services segment, largely on account of election related uncertainty.

DID INFLATION PLAY THE SPOILSPORT IN Q1FY25?

There in an interesting piece of data that one must look into the GDP story; which is the nominal growth, or the growth without considering the inflation effect. The Real GDP growth in Q1FY25 at 6.7% may be lower than the 8.2% Real GDP growth recorded by the Indian economy in Q1FY24. However, the nominal growth at 9.7% in Q1FY25 was actually much better than the nominal growth of 8.5% in Q1FY24. That means, the gains in the previous year (just before the drought conditions became apparent), were more due to low levels of inflation. With inflation sharply higher on a comparable basis in FY25, the impact on the real growth has been much sharper, despite the sharp spike in nominal output.

What does mean for the RBI projected GDP growth rate of 7.2% for FY25 and its inflation projection of 4.5%. As far as the inflation projection is concerned, we have to wait to see how the inflation pans post monsoons. The 3.54% inflation in July 2024 may be a flash in the pan, so we need to look at sustainable inflation. However, the bigger challenge may be meeting the 7.2% growth target for FY25. With the first quarter at 6.7% (unless there is a major upward revision), the full year GDP growth may struggle to reach 7%. The lower GDP in Q1 was largely driven by agriculture and services, so that would hold the key. The first quarter also saw a gap of just 19 bps between the GDP and the GVA, showing the limited impact of taxes and subsidies on the growth story. Let us turn to the granular GDP story!

WHAT WE READ FROM Q1-FY25 REAL GDP / GVA

The table below captures the break-up of GVA growth in Q1FY25 compared to Q1FY24. Effective this quarter, the MOSPI has done a good job of separately reporting the growth of primary, secondary, and tertiary sectors, which makes it a lot more representative.

Q1FY25 REAL (GVA AND GDP) SECTORAL BREAKDOWN FOR LAST 3 FINANCIAL YEARS
Sectoral build-up of output growth	Q1FY23 (₹ crore)	Q1FY24 (₹ crore)	Q1FY25 (₹ crore)	Q1FY24 (YOY %)	Q1FY25 (YOY %)
PRIMARY SECTOR	5,82,779	6,07,200	6,23,784	4.2	2.7
Agriculture, Livestock, Forestry & Fishing	5,02,859	5,21,648	5,32,092	3.7	2.0
Mining & Quarrying	79,920	85,551	91,691	7.0	7.2
SECONDARY SECTOR	10,08,980	10,68,496	11,58,524	5.9	8.4
Manufacturing	6,09,518	6,39,709	6,84,792	5.0	7.0
Electricity, Gas, Water Supply & Utilities	91,145	94,034	1,03,805	3.2	10.4
Construction	3,08,318	3,34,754	3,69,927	8.6	10.5
TERTIARY SECTOR	19,29,266	21,36,301	22,90,427	10.7	7.2
Trade, Hotels, Transport, Others	5,88,075	6,45,039	6,81,942	9.7	5.7
Financial, Real Estate	9,03,194	10,17,115	10,89,219	12.6	7.1
Public Administration, Defence	4,37,997	4,74,148	5,19,267	8.3	9.5
Real GVA	35,21,025	38,11,997	40,72,734	8.3	6.8
Net Taxes	2,58,929	2,79,486	2,90,998	7.9	4.1
Real GDP	37,79,954	40,91,484	43,63,732	8.2	6.7

Data Source: MOSPI

The real GDP growth for Q1FY25 has fallen from 8.2% last year first quarter to 6.7% in the current quarter. Here are some key takeaways from the data above.

• The primary sector comprising of farming and mining saw real GVA growth fall to 2.7% from 4.2% in the first quarter of last year. The entire pressure came from the agriculture sector as the mining sector saw a marginal rise in output over last year. Clearly, the pressure on the farm sector appears to be a lag effect of the previous year.
  
• Secondary real GVA saw a sharp growth at 8.4% as compared to just 5.9% in the first quarter of the previous year. What is gratifying is that there was all-round traction in the secondary real GVA. Manufacturing was 200 bps higher at 7.0%, while construction was 190 bps higher at 10.5%. However, the big thrust came from utilities, surging 720 bps.
  
• The tertiary sector or the services sector saw a distinct slowdown in Q1FY25 at 7.2% as compared to 10.7% in Q1FY24. The slowdown was quite stark across trade, hospitality, and financial services. This could once again be attributed to the election uncertainty and we could see a lot of services demand and growth bouncing back in FY25.

If you look at the break-up of the real GVA and the GDP, the data is not all that disconcerting. The manufacturing output is sharply higher in Q1FY25 with manufacturing, construction and utilities showing positive growth. Clearly, the capex is showing traction. If the good monsoons and the revival in the services sector were to happen in Q2, things could start looking distinctively better in the rest of FY25.

Q1FY25 GDP GROWTH FROM EXPENDITURE STANDPOINT

The sectors that drive the GDP growth like primary sector, secondary sector, and tertiary sectors are the visible manifestations. Behind that is the real story, which is captured by the key drivers of this GDP growth. The triggers are captured in the table below.

Q1 REAL GDP EXPENDITURE COMPONENTS BREAKDOWN FOR LAST 3 FINANCIAL YEARS
Expenditure Components	Q1FY23 (₹ crore)	Q1FY24 (₹ crore)	Q1FY25 (₹ crore)	Q1FY24 (YOY %)	Q1FY25 (YOY %)
Private Final Consumption Expenditure (PFCE)	21,66,248	22,86,468	24,56,777	55.9	56.3
Government Final Consumption Expense (GFCE)	4,16,509	4,15,961	4,14,945	10.2	9.5
Gross Fixed Capital Formation (GFCF)	13,03,951	14,14,918	15,20,625	34.6	34.8
Changes in Stocks (CIS)	44,647	45,182	47,712	1.1	1.1
Valuables	35,436	27,991	24,796	0.7	0.6
Exports	9,35,660	8,73,875	9,49,854	21.4	21.8
Imports	9,59,074	11,05,210	11,53,943	27.0	26.4
Discrepancies	-1,63,422	1,32,299	1,02,967	3.2	2.4
Real GDP (₹ in Crore)	37,79,954	40,91,484	43,63,732	100.0	100.0
Real GDP (% change)		8.2	6.7	Not Applicable

Data Source: MOSPI

Here are some key takeaways from the table above.

• Private final consumption, generally a key driver of the India growth story, has seen its share improve by 40 bps to 56.3%. However, what is more gratifying is that, in rupee terms, it is steadily growing in the first quarter of the last 3 financial years.
  
• Gross fixed capital formation has also seen a 20 bps rise in contribution in Q1FY25 as compared to the previous year. Once again, this factor has seen a persistent increase over the last 3 years first quarter. Rising role of GCFC is a good long term signal.
  
• The share of government final consumption spending has tapered by 70 bps to 9.5%. That is not surprising considering that the government driven capex growth is sharply lower in FY25. That is understandable as the government focuses on cutting fiscal deficit.
  
• Finally, a quick look at trade. In the last 3 years, while the impact of imports has been rising, exports have been erratic. Fortunately, exports have bounced back to the Q1FY23 levels in absolute terms. Global trade constraints are pressuring the trade deficit.

In terms of triggers, the government is playing a smaller role, which is a long term positive. Also, private consumption and gross capital formation as triggers, have improved in the first quarter. Clearly, the triggers are still quite strong.

WHAT WE READ FROM Q1-FY25 NOMINAL GDP / GVA

The table below captures the break-up of nominal GVA growth in Q1FY25 compared to Q1FY24. The nominal growth represents the growth story, before the inflation effect, and is more the story of absolute output.

Q1 NOMINAL (GVA AND GDP) SECTORAL BREAKDOWN FOR LAST 3 FINANCIAL YEARS
Sectoral build-up of output growth	Q1FY23 (₹ crore)	Q1FY24 (₹ crore)	Q1FY25 (₹ crore)	Q1FY24 (YOY %)	Q1FY25 (YOY %)
PRIMARY SECTOR	11,25,265	11,71,059	12,70,732	4.1	8.5
Agriculture, Livestock, Forestry & Fishing	9,94,943	10,39,053	11,22,216	4.4	8.0
Mining & Quarrying	1,30,322	1,32,006	1,48,517	1.3	12.5
SECONDARY SECTOR	15,43,731	16,14,377	17,62,900	4.6	9.2
Manufacturing	8,72,693	8,91,128	9,61,161	2.1	7.9
Electricity, Gas, Water Supply & Utilities	1,41,120	1,60,133	1,73,527	13.5	8.4
Construction	5,29,919	5,63,116	6,28,213	6.3	11.6
TERTIARY SECTOR	32,40,953	36,10,285	39,90,994	11.4	10.5
Trade, Hotels, Transport, Others	9,43,186	10,10,571	10,89,404	7.1	7.8
Financial, Real Estate	14,58,508	16,44,162	18,10,553	12.7	10.1
Public Administration, Defence	8,39,259	9,55,552	10,91,037	13.9	14.2
Nominal GVA	59,09,950	63,95,721	70,24,626	8.2	9.8
Net Taxes	5,89,612	6,53,873	7,06,353	10.9	8.0
Nominal GDP	64,99,562	70,49,594	77,30,979	8.5	9.7

Data Source: MOSPI

The nominal GDP growth for Q1FY25 has, ironically, risen from 8.5% last year first quarter to 9.7% in the current quarter. Here are some key takeaways from the data above.

• The primary sector comprising of farming and mining saw nominal GVA growth spike to 8.5% from 4.1% in the first quarter of last year. While agricultural output was sharply lower in real terms, it is higher in nominal terms, showing a high rural inflation impact.
  
• Secondary nominal GVA doubled to 9.2% as compared to just 4.6% in the first quarter of the previous year. The utilities sector appear to have gained in real terms, despite being lower in nominal terms. Manufacturing trend was similar for real and nominal growth.
  
• The tertiary sector or the services sector saw lower nominal growth in Q1FY25 at 10.5% compared to 11.4% in Q1FY24. The slowdown was less evident in trade and hospitality, but visible in financial services.

It does look like inflation in general, and rural (farm) inflation in particular has played an important role in pulling down the real GDP and real GVA. The nominal growth story paints a rosier picture. With rural inflation tapering, we could see this situation improving in FY25.

Q1FY25 NOMINAL GDP GROWTH FROM EXPENDITURE STANDPOINT

Behind the nominal growth story, we capture the impact of the actual triggers driving the shift in growth. The triggers are captured in the table below.

Q1 NOMINAL GDP EXPENDITURE COMPONENTS BREAKDOWN FOR LAST 3 FINANCIAL YEARS
Expenditure Components	Q1FY23 (₹ crore)	Q1FY24 (₹ crore)	Q1FY25 (₹ crore)	Q1FY24 (YOY %)	Q1FY25 (YOY %)
Private Final Consumption Expenditure (PFCE)	38,44,545	41,54,971	46,68,411	58.9	60.4
Government Final Consumption Expense (GFCE)	7,34,534	7,54,304	7,84,897	10.7	10.2
Gross Fixed Capital Formation (GFCF)	20,40,363	22,16,435	24,17,495	31.4	31.3
Changes in Stocks (CIS)	68,385	68,868	74,900	1.0	1.0
Valuables	50,516	44,488	44,338	0.6	0.6
Exports	15,28,756	15,18,443	16,62,787	21.5	21.5
Imports	17,71,718	16,92,336	18,46,356	24.0	23.9
Discrepancies	4,183	-15,579	-75,492	-0.2	-1.0
Nominal GDP (₹ in Crore)	64,99,562	70,49,594	77,30,979	100.0	100.0
Nominal GDP (% change)		8.5	9.7	Not Applicable

Data Source: MOSPI

Here are some key takeaways from the table above.

• How did the components or triggers drive the nominal growth story? Private final consumption, generally a key driver of India growth in India, has seen its share improve by 150 bps to 60.4%. However, what is more gratifying is that, in rupee terms, the growth has sharply accelerated in Q1FY25, as compared to previous years.
  
• Gross fixed capital formation has seen a 10 bps lower contribution in Q1FY25 as compared to the previous year. Once again, this factor has seen a persistent increase over the last 3 years in absolute terms, and that is still a positive signal that the lag effect of the sharply higher capex of past few years is at work.
  
• The share of government final consumption spending has tapered by 50 bps to 10.2% in nominal terms, just as in real terms. That is not surprising considering that the government driven capex growth is slowing and the government is making a conscious attempt to get the private sector to play a bigger role.
  
• Finally, a quick look at trade in nominal terms. In the latest year, the story is of a revival in export trade of goods after a slowdown in FY24. Clearly, the make in India initiatives are starting to show results. For now, the Middle East will hold the key, but export and import share is broadly static.

Much of the fall in growth in Q1FY25 is in real terms, while most of the segments of the economy have done better in nominal terms. Hopefully, once the inflation normalizes, we should see a more robust real GDP growth number.

READING THROUGH THE MAZE OF GDP NUMBERS

Whie the real GDP growth numbers are distinctively lower in Q1FY25, there are three reasons for the same. Firstly, the lower real growth is largely due to the inflation effect as the nominal growth continues to be robust. Secondly, first quarter has traditionally been a weak quarter and the lower end of the seasonal cycle. This was partially exacerbated by election related challenges and delayed monsoons. Thirdly, there is a bigger role that private final consumption and gross capital formation have played in the GDP growth in the first quarter. That is despite the government playing a smaller role; and that is a good sign.

What does it mean for the remaining quarters of FY25? It may be too early to say, but we can start with assumption that FY25 GDP growth may be closer to 7%, due to the high base effect. However, better agricultural output and lower inflation could mean a change for the better!