ICRA has projected the year-on-year (YoY) GDP expansion to moderate to a six-quarter low of 6 per cent in Q1 (April-June) FY25, amidst a contraction in Government capital expenditure and a dip in urban consumer confidence, even as the value of new project announcements plunged to ₹1.2 lakh crore in Q1FY25, the lowest cost in any quarter in two decades.

GDP growth and the value of new project announcements in Q4FY24 was at 7.8 per cent and ₹12.8 lakh crore, respectively.

Further, it estimated the growth in the gross value added (GVA) to ease to 5.7 per cent in Q1 FY25 from 6.3 per cent in Q4 FY24, 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 per cent from +0.6 per cent).

For the full-year FY2025, the credit rating agency 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 Government of India’s (GoI) 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.

ICRA assessed that 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. It reasoned that 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 Government of India (GoI; +3.6 per cent in Q1; -24.2 per cent in Q4 FY2024).

Aditi Nayar, Chief Economist, Head-Research & Outreach, ICRA said: “Q1 FY2025 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.

“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 per cent , respectively,” Nayar said.

Referring to the considerable headroom for the GoI’s capital expenditure, she expects this to catapult GDP growth back above 7 per cent in H2 (2nd half) FY2025.

Transient lull in investment activity

ICRA noted that India witnessed a transient lull in investment activity in Q1 FY2025. For instance, the capital expenditure of the GoI 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 Q1 FY2025.

Additionally, the value of new project announcements plunged from Rs. 12.8 lakh crore in Q4 FY24 to ₹1.2 lakh crore in Q1 FY25 - this was the lowest cost in any quarter in two decades (₹40,000 crore in Q1 FY05).

Further, the value of completed projects stood at a meagre ₹50,000 crore in Q1 FY25, the lowest level since Q2 (July-September) FY08 (₹39,000 crore, barring the Covid quarters).

ICRA said the performance of half of the 14 indicators tracked by it saw a deterioration in Q1 FY25 relative to Q4 FY24, 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 Commercial Paper volumes.

In contrast, seven indicators improved on a YoY basis in Q1 FY25, largely related to public spending, transport, communication and exports. These include non-interest revenue spending of the GoI and aforesaid 22 state governments, Commercial Vehicle 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 per cent in Q1 FY2025.

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