India’s Q1 FY2025 GDP Slows, Potential MPC Rate Cut Expected

India’s economic landscape is facing a period of moderation as Q1 FY2025 GDP data is set to reveal a significant slowdown. The latest projections indicate that GDP growth will ease to 6 percent in Q1 FY2025, marking a six-quarter low and a substantial drop from the 7.8 percent growth recorded in Q4 FY2024. This anticipated deceleration is notably below the Monetary Policy Committee’s (MPC) forecast of 7.1 percent for the quarter. However, this slowdown is largely attributed to temporary and technical factors, with expectations for a rebound in growth to above 7 percent in the latter half of FY2025.

A key factor driving this slowdown is a technical aspect involving the narrowing gap between GDP and Gross Value Added (GVA) growth. This gap, which reflects net indirect taxes (the difference between indirect taxes and subsidies), is projected to contract sharply. In H2 FY2024, a steep decline in the subsidy bill led to a widening of the GDP-GVA growth gap, reaching 178 basis points (bps) in Q3 and 148 bps in Q4. For Q1 FY2025, this gap is expected to narrow to around 30 bps due to single-digit growth in both government subsidy expenditure and indirect taxes. This compression is anticipated to affect GDP growth more significantly than GVA growth, with GVA growth projected to ease by a relatively smaller 60 bps to 5.7 percent from 6.3 percent in Q4 FY2024.

In addition to this technical factor, there are clear signs of a temporary slowdown in investment activity. This is evident from multi-year lows in new project announcements and completions, along with a year-on-year deterioration in most investment-related indicators compared to the previous quarter. The parliamentary elections created uncertainty and delays in project commissioning, contributing to the slowdown. Moreover, capital expenditure by both central and state governments saw sharp contractions of 35 percent and 23 percent, respectively, during this period. These factors have further dampened gross fixed capital formation (GFCF) growth in Q1 FY2025, exacerbated by an unfavorable base effect.

Consumer sentiment, particularly in urban areas, has also shown signs of weakening. According to the RBI’s Consumer Confidence Survey rounds from May and July 2024, urban consumer confidence has declined. This deterioration is attributed to several transient factors, including heatwaves affecting retail footfall, excess rainfall in early July, and elevated food prices. Additionally, reduced government capital spending’s impact on employment in certain sectors may have contributed to this decline. Rural consumer sentiment has been constrained by the lingering effects of last year’s unfavorable monsoon and an uneven start to the 2024 monsoon season. Consequently, growth in consumption demand is expected to have remained sluggish in Q1 FY2025.

On the production side, the deceleration in GVA growth is anticipated to be primarily driven by the manufacturing and construction sectors. Manufacturing companies have experienced a slight easing in profit margins amid rising global commodity prices, and growth in manufacturing Index of Industrial Production (IIP) volumes has slowed. The construction sector has likely faced a temporary lull in momentum, as indicated by weakening performance across most infrastructure and construction-related indicators compared to Q4 FY2024.

Looking ahead, there are positive signs on the horizon. Government capital expenditure is expected to pick up significantly in H2 FY2025, and a healthy kharif harvest is anticipated to boost rural demand. While there is cautious optimism about potential improvements in urban consumer confidence in the next survey round, a lack of improvement would be a cause for concern.

If Q1 FY2025 GDP growth aligns with ICRA’s expectations, it may lead to a downward revision of the MPC’s 7.2 percent GDP growth estimate for FY2025. This could prompt the Committee to place greater emphasis on the growth outlook in its October 2024 meeting. Additionally, the recent Consumer Price Index (CPI) inflation numbers, which fell to a 59-month low of 3.5 percent in July 2024 from 5.1 percent in June, and expectations of similarly benign figures for August, may also influence the MPC’s decisions. These factors are likely to lead to a downward revision of the MPC’s Q2 FY2025 CPI inflation estimate of 4.4 percent.

Given these developments, a shift in the MPC’s tone towards monetary easing is anticipated in the October 2024 meeting. However, the views of new external MPC members will be crucial in determining the direction of monetary policy. Overall, while short-term economic indicators present some challenges, the longer-term outlook remains positive, with expectations for a rebound in growth in the latter half of the fiscal year.

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