Can the Q3 GDP growth uptick drive a positive momentum for the Sensex?

India's real GDP growth picked up pace in the third quarter of FY25, growing 6.2% in October-December 2024, compared to 5.6% in Q2. This increase is attributed to stronger consumption demand, as per the latest GDP data released by the National Statistics Office (NSO). However, the economy needs to achieve a 7.6% growth in the January-March quarter to meet the projected 6.5% growth target for the fiscal year.

The government's second advance estimates for FY25 show a marginal improvement in growth projections, rising to 6.5% from the previous 6.4%. This growth comes despite a significant upward revision of GDP data for FY24, with growth now pegged at 9.2% from 8.2% earlier. FY24's 9.2% growth rate is the second-highest in the last 12 years, demonstrating strong recovery post-pandemic.

Key Factors Driving Growth in Q3 and Q4

Chief Economic Advisor V Anantha Nageswaran highlighted three key factors supporting the GDP uptick in Q3 and the potential for 7.6% growth in Q4:

Export Performance: India’s export sector, particularly non-petroleum and non-jewellery exports, has shown robust growth, increasing nearly 10% in the April-January period.

Government Capex: Public sector capital expenditure (capex) has been strong, with 75% of the budgeted target already spent by the end of January. After a slow start due to the elections, government investment picked up pace in Q3.

Mahakumbh Spending: The Mahakumbh saw 50-60 crore people participating in the religious gathering, which spurred significant consumer spending, contributing positively to GDP in Q3 and potentially spilling into Q4.

Growth Outlook

Despite the challenges, the outlook for FY25 remains promising, driven by strong agricultural growth (4.6%) and private consumption expenditure, which is expected to rise by 7.6%. However, the manufacturing sector has shown signs of slowing down, with a projected growth of only 4.3% compared to 12.3% in FY24. Government final consumption expenditure (GFCE) is also expected to slow to 3.8%, down from 8.1% in FY24, as public spending moderated earlier in the year.

Investment demand, reflected in the Gross Fixed Capital Formation (GFCF), is expected to rise by 6.1%, slower than the previous year's 8.8%. In Q3, GFCF grew by 5.7%, the slowest pace in seven quarters.

Sectors Performance

Agriculture is expected to continue being a growth driver, supported by strong kharif crop output and an expected good rabi crop. The rural economy is showing resilience, and agricultural growth is expected to contribute significantly to overall GDP.

Manufacturing growth has been revised downward to 4.3%, influenced by pressures on corporate profitability and urban consumption. The services sector, however, remains robust, with a projected growth of 7.3%, although slightly lower than last year's 9%.

Mining, electricity, and construction are also expected to grow at a slower pace compared to last year. The mining sector is expected to grow by 2.8%, and electricity, gas, and water supply services are forecast to grow by 6.0%.

Challenges Ahead

Achieving the target of 7% growth in Q4 may be difficult, with uncertainties surrounding investment demand and geopolitical risks. However, with inflation expected to moderate to 4.5%, economists believe that real wages may improve, bolstering consumption demand in the final quarter.

India’s Q3 GDP growth surged to 6.2%, driven by strong consumption, exports, and government spending. This uptick raises hopes for a positive Q4, with a targeted 7.6% growth. If sustained, this economic momentum could potentially bolster investor confidence, leading to a positive trend for the Sensex.