The GDP growth rate for Q2FY25 came in at 5.4%; the slowdown in growth was sharper than street estimates. Going by the slowdown in corporate earnings, a marginal easing was expected but not to the extent of the official print. The GDP growth rates for the preceding quarter and the year ago period were 6.7% and 8.1% respectively.
As per NSO data on the Gross Value Added (GVA), the growth rate for Q2 was 5.6%. Agriculture & Allied activities witnessed pick up in pace; a healthy monsoon buoyed the farm economy. The negative surprise in terms of the headline numbers was on the back of weak industrial growth. The mining activity saw degrowth and the manufacturing eased sharply to 2.2% as compared to 7% in the preceding quarter. Electricity generation too reported a slowdown. The construction growth was relatively robust at 7.7%. Even as the government policies remain supportive, the slowdown in consumption may impact the industrial activity going ahead as well.
The contribution of the services sector remained stable around the 7% handle. Within the services sector, the growth for Public Administration, Defence and Other services held up well. The Trade, Hotels, Transport, Communications & Broadcasting Services remained stable but sub-par.
As per the use-based classification, the softness in private consumption and the government spending were a major drag on the GDP growth numbers. The general elections affected the government spending, while the sluggish consumption is attributed to low wage growth. While the expected robust agricultural growth may support rural consumption, the urban consumption may continue to be weak. The growth for Gross Fixed Capital Formation, Private Consumption and Government Consumption is estimated at 5.4%, 6.0% and 4.4% respectively.
Government capex has been the main pillar supporting the GDP growth over the last few years. The government tightening its purse strings had an adverse impact on the growth rates for the last two quarters. The second factor of import is the waning consumption and manufacturing growth. The government expenditure may revive over the next two quarters as the allocations for capex have already been budgeted and accounted for. The more worrying trend has emerged on the consumption and the private capex front.
Even as the RBI’s growth estimates are pegged at 7.2% for FY25 at the current juncture, it may get revised lower in the upcoming policy meet. We maintain our stance that GDP growth of 6.5% is something that looks more realistically achievable. The structural growth story remains intact, but the near term cyclical headwinds do persist. The GDP numbers indicate that from here on the situation is emerging wherein the RBI may have to move its stance towards supporting growth sooner than earlier envisaged. The growth concerns need to get preference over inflation in components that may not necessarily get influenced by a tight monetary policy.
