India's GDP: A Welcome Broad-basing Of Growth

India’s Q1 gross domestic product (GDP) growth moderated to 6.7 per cent year-on-year, compared to street expectations of 6.8 per cent and RBI’s downward revised estimate of 7.1 per cent. A moderation was largely baked in due to the shadow of prolonged Lok Sabha elections and weather-related disruptions. Notably, GVA increased by 6.8 per cent up from 6.3 per cent in the previous quarter.

Given that GDP is a gross number and is the total of everything we produce over a given period, there are multiple ways to slice and dice it. Hence, one of the ways is to look for balance – and better balance is the standout story emerging from the Q1 numbers.

First, there has been a welcome narrowing of the gap between GVA and GDP which fell sharply to just 10 bps in Q1 FY25 as against the yawning 150 bps gap in Q4FY24. The Q4 chasm was caused by a steep fall in subsidy outgo and a sharp increase in indirect tax collection as GDP numbers are derived by adding net indirect taxes to GVA after deducting subsidies. Thus, even as broader growth remained resilient, there was huge consternation over the much higher GDP number as compared to the GVA number, sparking a debate over the veracity of both measures in stating the true state of underlying growth. While negative growth in net indirect taxes pulled GDP below GVA in Q1, in fact, the details of the GDP and GVA data were much better than expected in Q1 and hint at a better-balanced growth in FY25 as compared to FY24.

Second, there was a narrowing of the wedge between consumption and investment with a semblance of balanced growth after a protracted period of uneven growth wherein consumption lagged discernibly. Both Private consumption and Fixed Capital Formation grew at nearly identical 7.4 per cent and 7.5 per cent respectively. Private consumption saw a sharper jump of 340 bps – the highest in the last 7 quarters, while fixed capital formation moved up 100bps.

The share of private consumption in GDP rose 250 bps to 60.4 per cent as compared to Q4FY24, moderation in urban consumer sentiment and heatwaves notwithstanding. With the above-normal monsoon thus far, significantly improved reservoir storage levels and higher kharif sowing, agricultural output and rural demand should perk up in the remainder of the year.

The fixed capital formation also ought to do even better going forward. Note that capital expenditure bore the brunt of prolonged election campaigns and in fact, the fall in investment activity during these elections was worse than during any of the past several elections. New announcements and project completions were nosedived. In Q1, new project announcements and project completions plummeted to their lowest levels in the past 2 decades. 

Announcements of new investment proposals also suffered with private sector announcements down by 87 per cent YoY and govt sector announcements lower by 77 per cent YoY. However, the election effect usually gets quickly reversed, as evidenced in the past. With the government at the helm reiterating its commitment to Infra spending, the centre is likely to make up in the remaining quarters to meet its FY25 Infrastructure budget target of Rs 11.1 trillion.

Importantly, as per a recent RBI analysis of investment intentions of private corporates, the total envisaged cost of the projects financed by banks/FIs reached a new high of Rs 3.9 trillion during FY24, with 54 per cent planned to be invested by the year-end. As per the study, the phasing profile of the pipeline of projects suggests that the envisaged capex will increase significantly to Rs 2.45 trillion in FY25 from Rs 1.59 trillion in FY24. Thus, rising domestic demand and capacity utilisation, sustained credit demand, business optimism and the government's thrust on infrastructure bode well for private capital investment for the remainder of FY25.

The underlying growth impulse remains strong. Core GDP growth, which excludes more volatile components of agriculture and public administration, remained strong at 7.3 per cent. Core growth is broadly reflective of private sector activity and underscores the strong underlying momentum. Recovering rural demand and consumption, buoyant capital markets, and improving corporate capex should give a leg-up to growth even as some deceleration in urban demand, slowing top-line growth of India Inc., weaker global growth and exports weigh on the overall pace of growth.

On balance, the broad-basing of growth will augur well for the sustenance of India's growth story and hence is a key monitorable. Acceleration in consumption and public investment along with a pick-up in private capex will help India grow at near ~7 per cent in FY25 and also sustain its growth trajectory over the medium term amid one of the most complex environments for global growth in decades.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the publication.