India’s initial Q2 FY2025 GDP and GVA numbers were quite disappointing, with the year-on-year (YoY) growth printing at a seven-quarter low each of 5.4 per cent and 5.6 per cent, respectively, well below our estimate of 6.5-6.6 per cent.

The negative surprise was largely on account of the industrial segment, which witnessed a significantly sharper-than-expected slowdown, with excess rains in August-September 2024 temporarily weighing down on mining output and electricity demand, and an adverse base and weak demand impacting manufacturing GVA growth in the quarter. Additionally, services GVA growth dipped, while remaining above the 7.0 per cent mark.

Along with the robust albeit lower-than-expected growth in services, the expected uptick in the agricultural GVA growth to a five-quarter high of 3.5 per cent in Q2 FY2025 from 2.0 per cent in Q1 FY2025, was perhaps the only other redeeming feature of the GDP dataset.

Slowing private consumption

On the expenditure side, private consumption growth slowed between these quarters, despite a low base, although we remain skeptical of the Q1 print and believe that it may be revised downwards when the Q3 FY2025 data is released in February 2025. Additionally, investment activity curiously slowed down, despite the turnaround in Government capex, while net exports exerted a larger drag as compared to that in Q1.

Looking ahead, economy watchers are quite divided on the outlook for the second half of this fiscal. We believe that growth likely bottomed out in Q2, and the trajectory is set to improve in the next two quarters, aided by an uptick in government capex, rural demand, and the dissipation of the transient impact of heavy rains.

Following the YoY contraction of 14.7 per cent in April-October FY2025, the Centre needs to incur a considerable capex of ₹6.4 trillion in the remaining five months of the fiscal to meet the FY2025 RBE of ₹11.1 trillion.

Capex growth

This implies a substantial YoY growth of 61 per cent during this period, which seems unlikely to be achieved. We now expect the FY2025 target to be missed by at least ₹1.0 trillion. Despite this, the YoY government capex growth in H2 FY2025 would still be quite high, providing a solid boost to GDP growth. A similar story is expected to play in terms of the capex for the State governments.

Additionally, ICRA remains optimistic about the rabi crop, considering the favourable impact of high reservoir storage and the ensuing La Nina conditions on sowing and crop yields, even as the low inventory levels of DAP pose a concern and initial sowing has admittedly been slow in a warmer-than-usual November. Further, farm cash flows from a healthy kharif output are likely to provide a fillip to rural demand in the second half of the fiscal.

Simultaneously, urban consumption is likely to remain uneven in H2, amid the adverse impact of sustained elevated food inflation levels on the budgets of low- and middle-income households, which would continue to impact low-ticket and discretionary consumption. Additionally, the deceleration in the non-housing personal loan growth will weigh on urban consumption to some extent. Moreover, ICRA remains watchful of the impact of geopolitical and tariff-related developments on commodity prices and external demand.

On balance, ICRA expects GDP growth in H2 FY2025 to print appreciably above the levels seen in the initial data for Q2. Nevertheless, primarily led by the lower-than-expected print for the just-concluded quarter, we have revised our forecast for the full-year expansion to 6.5 per cent from 7.0 per cent.

The writer is Chief Economist, Head- Research & Outreach, ICRA