Private Consumption Story Adds Colour To Modi Govt's Capex Glory

India's real gross domestic product (GDP) growth for Q1FY25, at 6.7 per cent year-on-year (YoY) chimed in below expectations of 6.9 per cent, according to data released by the National Statistical Office (NSO) on 30 August. The State Bank of India (SBI) in a report said that the figure reflects a growing economy even as the last bit of juice from pandemic era base effects (which played a role in Q1 in the past 3 years) dried up. 

The real gross value added (GVA) grew by 6.8 per cent YoY with the gap between GVA and GDP narrowing sharply to 0.1pp (GVA – GDP) due to lower net indirect taxes. Importantly, the drivers of growth have gone beyond government-led capex into the realm of private consumption, with the apparition of private capex on the horizon, the report added. 

The private final consumption expenditure (PFCE) has also seen an increase, growing by 7.4 per cent in Q1FY25, compared to 4.0 per cent in Q4FY24. However, government final consumption expenditure (GFCE) saw a slight decline of 0.2 per cent in Q1FY25. The gross capital formation (GCF) and gross fixed capital formation (GFCF) both saw growth rates of 7.1 per cent and 7.5 per cent respectively in Q1FY25. 

“As FY25 progresses, the rural consumption is helped by above-normal monsoons, with augmenting the already strong urban consumption. Some evidence of this effect is already been seen in Jul'24’s data which shows robust 2W sales, low MGNREGA work demand and growing FMCG sales,” the report added.

Accordingly, union expenditure was slim in 4MFY24 even as net direct tax revenues maintained a stellar growth of 22.5 per cent YoY y/y (as of 11 August 2024). As the fiscal progresses, a pickup in both types of government expenditure is expected in line with the Union budget’s theme of broad-basing of growth as the impact of the poll season and monsoons wears off– boosting both the GFCE and GFCF.

Sectoral Breakup
A sectoral breakup showed that industry GVA remained strong, though decelerating to 8.3 y/y in Q1FY25 from 8.4 per cent in Q4FY24. Construction activity sizzled and has now outpaced overall GVA growth for a startling 10 quarters. The trend is expected to be even stronger in the remainder of FY25. 

Electricity consumption surged in Q1, growing this segment by 10.4%. Manufacturing activity took a breather as evidenced by a modest IIP of 3.8 per cent YoY in Q1, even as select segments such as steel production aced. Some downward drift has also been felt in the plateauing of corporate profits on a high base in Q1FY25.

Ealier, the rating agency Icra in a report has said that the Modi government's capex shrunk by 35 per cent year-on-year (YoY) in Q1 FY2025, and the capital outlay and net lending of 24 states dipped by 12 per cent YoY in 2MFY2025. Accordingly, a sharp expansion is required in the remainder of the fiscal (Centre: +39 per cent and 24 states: +38 per cent) to meet the respective targets for FY2025.

The rating agency believes that achieving the Central government's and states’ capex target in FY2025 would be an ambitious task, amid the election-related disruptions in the early part of the fiscal. Besides, there is uncertainty around the absorption of the entire budgeted amount for capex loans to states (Rs 1.5 trillion: 44 per cent growth over FY2024 RE) in the remaining eight months of the fiscal, which would depend on guidelines for a tied portion of the scheme.

The rural economy of India has emerged as a significant driver of economic growth, outpacing urban areas largely due to increased government spending in recent quarters, highlighted a report by Anand Rathi, a financial service company. "Rural India continues to outpace urban areas in growth, largely due to a significant rise in government spending in rural regions in the last quarter," said the report.