Is India’s growth momentum sustainable amid emerging economic risks?

By: Shantanu Bhattacharji

Public capex soared 47.7% in Q3FY25, but private investment lagged, dragging the investment-to-GDP ratio to a three-year low of 31.9%. The widening gap signals uneven growth momentum, raising concerns over sustained economic expansion amid tepid private sector participation.

India’s economy picked up pace in the October-December quarter, with GDP growth hitting 6.2 per cent, up from 5.6 per cent in the prior period. Strong rural consumption, aided by a favourable monsoon, and increased government spending have driven the rebound. With the National Statistics Office (NSO) revising FY25 GDP growth to 6.5 per cent, optimism is high. But a deeper look reveals growing vulnerabilities.

Manufacturing’s sharp slowdown to 4.3 per cent from last year’s 12.3 per cent is concerning, as it signals sluggish industrial activity. The government spending, which has been a key pillar of growth, is expected to slow to 3.8 per cent, pointing to fiscal prudence. The ambitious Q4 growth target of 7.6 per cent could be a stretch if private investments don’t step up.

Expect policymakers to double down on supply-side measures, including manufacturing incentives and infrastructure spending. The Reserve Bank of India (RBI) will likely tread cautiously on rate cuts, given external risks. If private consumption weakens, achieving 6.5 per cent GDP growth could become more challenging.

The economy showed resilience in the December quarter, with agriculture expanding by 5.6 per cent—aided by steady rabi sowing—and services surging to a three-quarter high of 7.4 per cent, driven by public administration, defence, and essential services. However, weaknesses persist. Manufacturing growth remains sluggish at 3.5 per cent, while construction cooled to 7 per cent from 8.7 per cent in the prior quarter, signalling potential investment fatigue.

A silver lining is the widening consumption base, as rural real wages in agriculture posted a second consecutive quarter of positive growth. This suggests lower-income households are catching up, adding momentum to domestic demand.

The investment story is turning lopsided. While public capital expenditure surged 47.7 per cent in nominal terms, private sector capex remains weak. The investment-to-GDP ratio slipping to a three-year low of 31.9 per cent in Q3FY25 highlights this imbalance. Despite government efforts, corporate reluctance to invest suggests lingering uncertainty, while household investment in real estate shows signs of moderation.

Heavy reliance on public capex is unsustainable in the long run. A meaningful private investment revival is crucial for sustaining growth beyond consumption and government spending.

Notably, the growth engine is running on consumption and government spending, while investment momentum remains weak. Private final consumption expenditure (PFCE) accelerated to 6.9 per cent in Q3FY25, up from 5.9 per cent, signalling robust demand. Meanwhile, the government spending rebounded sharply to 8.3 per cent, reversing an election-led contraction earlier in the year.

However, investment demand remains a concern. Gross fixed capital formation (GFCF), a key indicator of investment activity, slowed to 5.7 per cent, reflecting private sector hesitancy. While services exports helped push overall exports up by 10.4 per cent, three consecutive quarters of import contraction (-1.1 per cent) suggest domestic investment and industrial activity may be losing steam.

With government spending likely to moderate, sustaining growth will depend on private sector investment picking up. Analysts say the government may introduce further incentives, but corporate sentiment remains cautious. External risks and fiscal constraints could limit aggressive policy moves, making private consumption the key driver—though its resilience will be tested in the coming quarters.