India's GDP growth slows to 6.4% for FY25, lowest in four years

India's economy is expected to slow down in the fiscal year 2024-25, with GDP growth projected at 6.4%, according to the government's first advance estimate. This marks the slowest growth rate in four years, following the pandemic-induced contraction of 5.8% in FY21. The estimate is lower than previous forecasts from the finance ministry and the Reserve Bank of India (RBI), which had predicted growth in the range of 6.5-6.6%.

Despite this slowdown, India remains the fastest-growing major economy globally. The slower pace of growth follows a weak performance in the July-September 2024 quarter, which registered the slowest growth in two years. This decline is attributed to persistent inflation, subdued urban consumption, low private sector investments, and weak manufacturing activity. Furthermore, government spending was lower during the first quarter due to elections.

However, the government expects a rebound in the latter half of FY25, with growth primarily supported by agriculture, construction, and services sectors. Nominal GDP growth, which includes inflation, is forecast to be 9.7% in FY25, slightly up from 9.6% in the previous fiscal year.

The first advance estimates, which are subject to revisions as more data becomes available, will guide the preparation of the Union Budget, set to be announced on 1 February 2025. D.K. Srivastava, Chief Policy Advisor at EY India, predicts a 10.5% nominal GDP growth for FY26, based on 6.5% real GDP growth and nearly 4% inflation.

Government Spending and Investment Outlook

Government consumption expenditure (GFCE) is projected to rise by 4.1%, reaching ₹17.21 trillion in FY25. Capital expenditure, indicated by gross fixed capital formation (GFCF), is expected to grow by 6.4%, down from 9% in FY24. While rural consumption shows promise, private sector investments remain sluggish, despite favorable conditions for growth.

Private Consumption and Trade Deficit

Private consumption is projected to grow by 7.3% in FY25, reaching ₹104.05 trillion. Rural demand is expected to support this growth, with indicators such as higher agricultural output and increased sales of two-wheelers pointing to a recovery in rural wages.

Meanwhile, India's trade deficit is anticipated to narrow to ₹1.09 trillion in FY25, down from ₹3.99 trillion in FY24. This is expected to reduce the drag on growth from net exports, which have remained negative in recent years.

Manufacturing and Construction Sectors

India’s manufacturing sector, which accounts for around 17% of GDP, is expected to grow at a slower pace of 5.3% in FY25, compared to 9.9% growth in FY24. Meanwhile, construction output is projected to expand by 8.6%, a slight decline from last year’s 9.9% growth.

As India navigates global uncertainties, policymakers are urged to continue prioritizing infrastructure investment to maintain economic stability and drive growth in the face of ongoing challenges.