Resilience During Election Uncertainties Enhances Confidence in Core Growth Fundamentals

India's GDP grew by 6.7% year-on-year in the first quarter of FY2025 (April-June 2024), aligning closely with projections of 6.5% to 6.7%. Despite being the slowest growth rate in the past five quarters, the Indian economy showed notable resilience, especially during the national elections. The economy's underlying strength remained evident, even amidst the uncertainties typically associated with election cycles.

From an expenditure perspective, the Indian economy remained robust, driven by strong private consumption growth. Private consumption surged 7.4% in Q1 FY2025, reaching a seven-quarter high. This rebound was particularly evident in the rural economy, where significant factors were easing inflation and improved farm output. The strong rural demand is expected to deliver a much-needed boost to overall consumption.

Investment spending, as indicated by gross fixed capital formation, also showed strong performance, growing by 7.5% during the quarter. This robust investment growth is particularly notable considering the election-related uncertainties, modest corporate profits, and significant repatriation of income from foreign capital flows. The steady investment pace underscores confidence in the long-term potential of the Indian economy despite temporary political uncertainties.

India’s exports grew 8.7% in Q1 FY2025, primarily driven by strong services exports. While goods exports had a mixed performance, with sectors like gems and jewellery experiencing declines, the overall export landscape remained favourable. Notably, the increase in machinery and electronics goods exports suggests a shift towards higher-value items, reflecting the country’s advancing industrial capabilities. Imports, however, saw a significant slowdown, growing by just 4.1% compared to 8.3% in the previous quarter. This reduction in import growth led to a positive net trade balance, enhancing overall GDP growth and reinforcing economic resilience during this period.

Manufacturing capacity utilisation has reached its highest level in 11 years at 76.8%, and strong order books indicate that private investments are likely to continue increasing. Additionally, the government’s reduced capital expenditure during the election period is expected to be offset in the latter half of the year, providing further economic support.

As the US elections conclude and with the potential for the US Federal Reserve to lower policy rates (as suggested in the recent Jackson Hole Symposium), India may experience increased capital inflows, leading to more long-term investment opportunities. With these factors in play, India’s GDP growth is projected to be between 7.0% and 7.2% for the full fiscal year, highlighting the country’s economic resilience and potential for sustained growth.