GDP Growth To Ease To 6.5% In Q2FY25 Doused By Heavy Rains, Weak Margins

Rating agency Icra has projected the year-on-year (YoY) expansion of the gross domestic product (GDP) to dip to 6.5 per cent in Q2 FY2025 from 6.7 per cent in Q1 FY2025, with heavy rains and weak margins offsetting the buoyancy injected by the turnaround in government capital expenditure and healthy trends in Kharif sowing. 

Further, the growth in the gross value added (GVA) is estimated to ease to 6.6 per cent in Q2 FY2025 from 6.8 per cent in Q1 FY2025, driven by the industrial (to +5.5 per cent from +8.3 per cent) sector, amid a pick-up in the expansion in services (to +7.8 per cent from +7.2 per cent) and agricultural GVA (to +3.5 per cent from +2.0 per cent).

Based on available data for the Centre and the states’ indirect taxes and subsidies, Icra estimates that the growth in net indirect taxes (in nominal terms) rose slightly from 9.0 to 9.5 per cent in Q2 FY2025 from 8.0 per cent in Q1 FY2025. Given this, the GDP-GVA growth wedge (in real terms) is expected to remain inverted in Q2 FY2025 as well, it added. 

Aditi Nayar, Chief Economist, Head- Research and Outreach, Icra said, “Q2 FY2025 saw tailwinds in terms of a pickup in capex after the Parliamentary Elections as well as healthy expansion in sowing of major kharif crops. Several sectors faced headwinds on account of heavy rainfall, which affected mining activity, electricity demand and retail footfalls, and a contraction in merchandise exports. Further, margins appear to have weakened for corporates in a variety of sectors in this quarter. As a result, we project a slight dip in India’s GVA and GDP growth in Q2 FY2025 to 6.6 per cent and 6.5 per cent, respectively."

Nayar added that the benefits of the healthy monsoons lie ahead, with upbeat kharif output and replenished reservoirs likely to lead to a sustained improvement in rural sentiment. In addition, there is considerable headroom for the central government's capital expenditure, which needs to expand by 52 per cent in YoY terms in H2 FY2025 to meet the budget estimate for the full year. 

"However, we are watchful of the impact of a slowdown in personal loan growth on private consumption as well as geopolitical developments on commodity prices and external demand. On balance, Icra expects a back-ended pickup in economic activity to boost the GDP and GVA growth in H2 FY2025, resulting in a full-year expansion of 7.0 per cent and 6.8 per cent, respectively,” added Nayar.

The rating agency estimates the industrial GVA growth to record a broad-based moderation to 5.5 per cent in Q2 FY2025 from 8.3% in Q1 FY2025, led by electricity (to +2.0 per cent from +10.4 per cent), mining and quarrying (to +1.5 per cent from +7.2 per cent), manufacturing (to +5.5 per cent from +7.0 per cent), and construction (to +7.0 per cent from +10.5 per cent).

Investment Activity
India’s investment activity improved in Q2 FY2025 over Q1, while remaining sluggish amid slow execution of infra projects owing to surplus monsoon rains, according to the Icra.

The Centre's capital expenditure reverted to a YoY expansion of 10.3 per cent YoY in Q2 FY2025 (Rs. 2.3 trillion), following the 35.0 per cent contraction seen in Q1 FY2025 (Rs. 1.8 trillion) led by the MoRTH (to +41.7 per cent from -39.6 per cent) and the Ministry of Railways (to +8.0 per cent from -15.2 per cent). 

While the combined capital outlay and net lending of the 22 state governments (excluding Arunachal Pradesh, Gujarat, Goa, Jharkhand, Manipur and Odisha) rose by 2.1 per cent YoY in Q2 FY2025 (-20.0 per cent in Q1 FY2025), the pace of expansion remained muted.

Additionally, new project announcements witnessed a healthy rebound to Rs. 6.7 trillion in Q2 FY2025 from a multiquarter low of Rs 2.2 trillion in Q1 FY2025. This was in sync with the historical trends, wherein new proposals picked up sharply in Q2 after the lull seen during the Parliamentary elections. 

The QoQ increase in the cost of announcements in Q2 FY2025 was much stronger by the private sector (to Rs 5.2 trillion from Rs 1.1 trillion) than by the government (to Rs 1.5 trillion from Rs 1.1 trillion). However, project completions remained subdued in Q2 FY2025, improving marginally to Rs 1.0 trillion from Rs 0.7 trillion in Q1 FY2025, partly affected by the monsoons.

Icra estimates the YoY expansion in the services GVA to rise to 7.8 per cent in Q2 FY2025 from 7.2 per cent in Q1 FY2025, amidst a mixed trend in the high-frequency indicators. 

Supported by the favourable trends for Kharif sowing and early estimates depicting a 5.7 per cent growth in kharif foodgrain output, as well as a low base, Icra expects the GVA growth of agriculture, forestry and fishing to accelerate to 3.5 per cent in Q2 FY2025 (+1.7 per cent in Q2 FY2024) from 2.0% in Q1 FY2025 (+3.7 per cent in Q1 FY2024).