GDP Growth to Seven-Quarter Low, FY 2025 Forecast Takes a Beating

By: Damini Mehta

The outlook for H2 FY2025 is clouded with uncertainties. Declining growth in net taxes is likely to persist, with a sharp fall projected due to reduced indirect tax collections and limited scope for reducing product subsidies.

India's GDP growth in Q2 FY2025 declined to 5.4%, marking a seven-quarter low and highlighting a slowdown across multiple sectors of the economy. This decline, as reported by the Ministry of Statistics and Programme Implementation, stands in sharp contrast to the 8.1% growth recorded in the same quarter last fiscal year. The deceleration reflects weaker momentum in key industries, reduced tax revenues, and challenges in private consumption and capital expenditure.

The performance of various sectors revealed a concerning trend. Mining and quarrying contracted by 0.1%, a significant fall from the robust 11.1% growth recorded in Q2 FY2024. Manufacturing growth also slowed sharply to 2.2% from 14.3% last year, while utilities posted a modest 3.3% growth compared to 10.5% in the previous fiscal period. The construction sector, although still growing, saw its pace diminish to 7.7% from the impressive 13.6% recorded a year earlier. These underperforming sectors dragged down the Gross Value Added (GVA), a key component of GDP.

The slowdown extended to other vital areas of the economy. Corporate tax receipts declined by 8.33% in Q2 FY2025, reflecting sluggish business activity. Net tax growth plummeted to just 2.7%, a sharp drop from the 12.7% growth in the same quarter last year. Financial services, real estate, and professional services, which had been strong growth drivers, saw their growth rates fall from 9.3% in H1 FY2024 to 6.9% in H1 FY2025. This weakening financial sector performance signaled broader economic challenges, particularly in areas reliant on consumer-driven growth.

GDP Projections Revised Amidst Slowdown

Amidst these challenges, analysts have adjusted their GDP projections downward. Morgan Stanley has cut its FY2025 growth forecast to 6.3% from an earlier estimate of 6.7%. The institution highlighted the impact of weak private consumption and declining capital expenditure as critical factors in the slowdown. However, it remains optimistic about a potential recovery in the latter half of the fiscal year, driven by increased government spending, improved rural demand, and easing financial conditions. High-frequency indicators, such as a strong festive and wedding season, hint at a possible rebound, with GDP growth in H2 FY2025 projected to average 6.6%.

Rating agency CRISIL also revised its growth outlook for FY2025, projecting a decline from 8.2% in FY2024 to 6.8%. Rising interest rates and limited fiscal stimulus were identified as key pressures on growth. CRISIL acknowledged positive trends in high-frequency indicators, such as automobile sales and export growth, which suggest that the slowdown in Q2 FY2025 might be temporary. However, risks remain tilted to the downside, with structural weaknesses in sectors like manufacturing and financial services posing significant challenges.

FY 2025 Growth Likely to Take A Hit

The outlook for H2 FY2025 is clouded with uncertainties. Declining growth in net taxes is likely to persist, with a sharp fall projected due to reduced indirect tax collections and limited scope for reducing product subsidies. The expenditure side also presents concerns, as weak private consumption, trade imbalances, and low fixed capital formation continue to weigh on demand. Government gross tax revenue (GTR) growth, which recorded a mere 1.65% in October 2024, points to constrained fiscal capacity, further limiting prospects for a robust recovery.

Despite the challenges, agriculture has emerged as a bright spot, benefiting from favorable kharif production and a healthy monsoon season. This sector's resilience could provide some support to the overall economic framework. Additionally, Morgan Stanley anticipates inflation to ease from its current level of 6.21% to 5-5.5% in the coming months, which, combined with potential liquidity-enhancing measures by the Reserve Bank of India (RBI), might stabilize financial conditions.

India’s economic growth trajectory in FY2025 reflects a mix of structural and cyclical challenges. With Q2 growth pulling down the H1 FY2025 average to 6%, analysts agree that achieving a growth rate exceeding 7% for the full fiscal year appears unlikely. Projections for FY2025 now range between 5.5% and 6.5%, with risks predominantly on the downside. For the government, addressing sectoral stagnation, revitalizing private investment, and enhancing fiscal capacity will be critical in steering the economy toward a sustainable growth path in the future.