India's Q2 FY-25 GDP growth rate-why muted?

India's Q2 FY25 GDP figures reveal a significant economic slowdown, falling to 5.4% year-on-year growth—a substantial drop from the projected 6.6%. This underperformance stems from a broad weakening across investment and consumption sectors. Private investment significantly lagged expectations, growing at only 5.4% compared to 7.5% in Q1, despite increased government spending. Consumer spending also weakened, declining to 6% year-on-year growth from 7.4% in Q1, primarily due to sluggish urban demand hampered by wage stagnation and elevated food prices. Export growth decelerated sharply (2.8% YoY from 8.7% in Q1), while imports contracted.

The Gross Value Added (GVA) mirrored this trend, slowing to 5.6% year-on-year. Industrial activity suffered a particularly sharp decline, with mining and manufacturing sectors experiencing contractions. However, the agricultural sector showed some positive growth. While the services sector maintained its growth momentum, high-frequency indicators pointed to persistent weakness in private consumption, especially in urban areas.

Consequently, growth forecasts have been revised downwards. The FY25 growth projection is now anticipated to be significantly lower than the initial 7.2% estimate, possibly around 6.3%, reflecting the weak first half of the fiscal year (6% YoY). While a modest improvement is expected in the second half, the FY26 forecast has also been lowered to 6.6% from the previous estimate of 6.8%. Inflation remains a key concern, with the 6.2% rate creating headwinds for potential monetary policy easing. While measures to improve liquidity may help offset tighter financial conditions, the RBI is likely to prioritize monitoring inflation trends before considering interest rate cuts.

In essence, India's economy faced a steeper-than-expected slowdown in Q2 FY25, primarily driven by weak investment of both Government and the private and the falling urban consumption. Although the agricultural sector displayed strength and government spending increased, the overall economic outlook remains cautious, highlighting the need for potential policy interventions to bolster growth and mitigate the effects of constrained liquidity.

IN the above chart we have tried to look at how GDP Annual Growth rate every quarter , Gross Fixed Capital formation and Consumer spending data have correlated.It shows high combined Consumer spending coupled with high GFC formation has always pushed up GDP growth with a lag effect of one or at the most two quarters.A weak GFC formation + Weak Consumer spending is pulling down GDP growth also with a lag effect.

So, IMHO, to push up Consumer spending, GOI should look at Fiscal push by slashing the Excise on Oil-Petrol & Diesel by atleast Rs10 since Inflation itself is a Tax and RBI should also address it through appropriate Rate and/or Liquidity decisions without any delay.Any undue delay in Rate cut can itself feed into Inflation.

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