The rating agency Icra has projected the year-on-year (YoY) expansion of the gross domestic product (GDP) to moderate to a six-quarter low of 6.0 per cent in Q1FY25 from 7.8 per cent in Q4FY24, amidst a contraction in Government capital expenditure and a dip in urban consumer confidence.
Further, the growth in the gross value added (GVA) is estimated to ease to 5.7 per cent in Q1FY25 from 6.3% in Q4FY24, driven by the industrial (to +6.4 per cent from +8.4 per cent) sector, along with a mild easing in the expansion in services (to +6.5 per cent from +6.7 per cent) and a slight pick-up in the agricultural GVA growth (to +1.0 per cent from +0.6 per cent).
Further, the gap between the GDP and the GVA growth is likely to moderate to ~30 basis points (bps) in Q1 FY2025 from 148 bps in the previous quarter. This is on account of an expected lower expansion in the net indirect taxes in Q1 owing to a turnaround in the subsidy outgo of the central government (GoI; +3.6 per cent in Q1; -24.2 per cent in Q4 FY2024), Icra noted.
Aditi Nayar, Chief Economist, Head-research and Outreach, Icra said, “Q1FY25 saw a temporary lull in activity in some sectors related to the Parliamentary elections and sluggish Government capex, both for the Centre and the states. Further, urban consumer confidence reported a surprising downtick in the May 2024 (and July 2024) rounds of the Central Bank’s Consumer Confidence Survey, while the lingering impact of last year’s unfavourable monsoon and an uneven start to the 2024 monsoon prevented a broader improvement in rural sentiment."
Nayar added that lower volume growth combined with diminishing gains from commodity prices weighed upon the profitability of some of the industrial sectors. The heat wave also affected footfalls in various service sectors, even as it provided a significant boost to electricity demand. On balance, we foresee a transient moderation in India’s GVA and GDP growth in Q1 FY2025 to 5.7 per cent and 6.0 per cent, respectively."
“For the full-year FY2025, ICRA expects a back-ended pick-up in economic activity to boost the GDP and GVA growth to 6.8 per cent and 6.5 per cent, respectively. In particular, there is considerable headroom for the GoI’s capital expenditure, which needs to expand by 39 per cent in YoY terms in July-March FY2025 to meet the Budget Estimate for the full year. This is expected to catapult GDP growth back above 7 per cent in H2 FY2025,” added Nayar.
ICRA estimates the industrial GVA growth to record a moderation to 6.4% in Q1 FY2025 from 8.4 per cent in Q4 FY2024, led by manufacturing (to +7.0 per cent from +8.9 per cent) and construction (to +4.0 per cent from +8.7 per cent). In contrast, electricity (to +11.0 per cent from +7.7 per cent), and mining and quarrying (to +6.5 per cent from +4.3 per cent) are projected to record an uptick in growth.
India's Investment Activity
India witnessed a transient lull in investment activity in Q1FY25. For instance, the capital expenditure of the government and 22 state governments (capital outlay and net lending for states except Arunachal Pradesh, Assam, Goa, Gujarat, Manipur, and Sikkim)recorded a YoY contraction of 35 per cent and 23 per cent, respectively, in Q1FY25.
Additionally, the value of new project announcements plunged from Rs 12.8 trillion in Q4 FY24 to Rs 1.2 trillion in Q1FY25 - this was the lowest cost in any quarter in two decades (Rs 0.4 trillion in Q1 FY2005). Further, the value of completed projects stood at a meagre Rs 0.5 trillion in Q1FY25, the lowest level since Q2FY08 (Rs. 0.39 trillion, barring the Covid quarters).
The profit margins of manufacturing companies eased in Q1 FY2025 vis-à-vis Q4 FY2024, amid an uptick in global commodity prices and the narrower deflation in input costs as reflected in the WPI-industrial raw materials (-0.3 per cent in Q1 FY2025 vs. -2.5 per cent in Q4 FY2024). This, along with the lower growth in manufacturing IIP volumes (to +3.8 per cent from +4.8 per cent), suggests that the YoY growth in manufacturing GVA is likely to have slowed in Q1 FY25.
Icra estimates the YoY expansion in the services gross value added (GVA) to ease slightly to 6.5 per cent in Q1 FY25 from 6.7 per cent in Q4FY24, amidst a decidedly mixed trend in the high-frequency indicators. The performance of half of the 14 indicators tracked by Icra saw a deterioration in Q1 FY2025 relative to Q4 FY2024, which can partly be attributed to the heatwave conditions that dampened mobility/travel. These include air cargo traffic, rail freight, consumption of petrol and diesel, GST e-way bills, domestic airlines’ passenger traffic and CP volumes.
In contrast, seven indicators improved on a YoY basis in Q1 FY2025, largely related to public spending, transport, communication and exports. These include non-interest revenue spending of the GoI and aforesaid 22 state governments, CV sales (aided by a favourable base), service sector exports, ATF consumption, ports cargo traffic and telephone subscribers.
Amidst a decline in the output of most rabi and summer crops and a deficient rainfall seen in June 2024, Icra expects the GVA growth of agriculture, forestry and fishing to print at 1.0 per cent in Q1FY25.
