At first glance, a real GDP growth of 6.7 per cent for the first quarter of FY25 looks underwhelming, when compared with 7.8-8.6 per cent in the previous four quarters and Reserve Bank of India’s projection of 7.1 per cent for Q1FY25. But when some underlying forces at work in the last quarter are taken into consideration the figures, in fact, appear robust. First, government consumption and capital expenditure was impacted by the general elections. Second, the heat wave disrupted economic activity in many regions. Besides, real GVA has recorded a higher sequential growth of 6.8 per cent in the quarter. The wide wedge between real GDP and real GVA growth, evident in the third and fourth quarters of FY24, has narrowed considerably as the sharp growth in net indirect taxes has normalised.

The data throw up some positives. The persistent slowdown in private consumption through FY24 improved in the first quarter. It grew 7.4 per cent in Q1FY25 compared to a growth of 5.5 per cent Q1FY24 and 4 per cent last fiscal. High frequency indicators show that this revival is led by rural consumption with urban consumption being impacted due to the increase in lending rates. Private capex is showing incipient signs of revival. An RBI study of private corporate investment (August 2024 Bulletin) observes that “about 944 projects got assistance from banks/FIs with a record high total cost of projects of ₹3,90,978 crore, as compared to 547 projects sanctioned during the previous year having total cost of ₹2,66,546 crore”.

A similar reversal is expected in government consumption which contracted 0.1 per cent in the first quarter due to reduction in the revenue expenditure of the Centre and States around the general elections. Likewise, a turnaround is expected in gross fixed capital formation. It slowed to 7.4 per cent in Q1FY25 (8.4 per cent in Q1FY24), compared to 8.9 per cent in FY24. But this was expected amidst elections; the Centre’s capital expenditure is reported to have contracted 35 per cent and State capex spends reduced by 21 per cent. Government capex is likely to gain traction now.

Sectoral GVA growth numbers present a mixed picture. GVA growth in agriculture and allied sectors, at 2 per cent, was below 3.7 per cent in Q1FY24 but better than 0.4 per cent and 0.6 per cent growth recorded in the third and fourth quarters of FY24. The satisfactory progress of the South-west monsoon and improving reservoir levels augur well for this sector. Services posted a healthy growth of 7.2 per cent. Manufacturing sector growth at 7 per cent is lower in sequential terms (8.9 per cent in Q4), but better in annual terms (5 per cent in Q1FY24). A rise in private consumption may have helped. But lower profitability due to rising input costs could have an impact. A pick up in demand, investment and a good monsoon point to the strong prospects of achieving about 7 per cent growth this fiscal. This may leave the central bank with space to focus on price stability.

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