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ICRA Forecasts India’s Q1 GDP Growth to Slow to Six-Quarter Low of 6%

ICRA

August 22, 2024

New Delhi, India

ICRA

India’s economic growth is projected to slow to 6% in the April-June quarter of FY2025, marking a six-quarter low, according to a forecast by domestic rating agency Investment Information and Credit Rating Agency of India Limited (ICRA). The slowdown is primarily attributed to a reduction in government capital expenditure and declining urban consumer demand.

ICRA’s GDP Growth Forecast: ICRA has predicted a year-on-year (YoY) expansion of 6% in Q1 FY2025, down from 7.8% in Q4 FY2024. This anticipated moderation comes amidst a contraction in government capital expenditure and a drop in urban consumer confidence. The official data for India’s GDP growth in the June quarter will be released by the Ministry of Statistics and Programme Implementation (MoSPI) on August 30. For context, the GDP growth rate for Q1 of FY2024 was 8.2%.

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Factors Behind the Projected Slowdown: Aditi Nayar, Chief Economist at ICRA, highlighted several factors contributing to the anticipated slowdown. She noted that the quarter experienced a temporary lull in various sectors due to the Parliamentary elections and sluggish government capital expenditure at both central and state levels. Additionally, the Reserve Bank of India’s Consumer Confidence Survey indicated a surprising decline in urban consumer confidence. The impact of unfavorable monsoon conditions from the previous year and an uneven start to the 2024 monsoon season further hindered improvements in rural sentiment.

Nayar added, “Lower volume growth combined with diminishing gains from commodity prices weighed on the profitability of some industrial sectors. The heatwave also affected footfalls in various service sectors, although it significantly boosted electricity demand.”

Gross Value Added (GVA) and Full-Year Forecast: ICRA also anticipates a slowdown in India’s Gross Value Added (GVA) growth, predicting it will ease to 5.7% in Q1 FY2025, down from 6.3% in the previous quarter. Despite this, the rating agency expects economic activity to pick up in the latter half of the fiscal year. For the full fiscal year FY2025, ICRA projects GDP growth at 6.8%, a decline from the 8.2% achieved in FY2024, with GVA growth expected to reach 6.5%.

Government Capital Expenditure and Economic Outlook: ICRA forecasts a significant increase in government capital expenditure in the second half of FY2025, which could drive GDP growth above 7%. Nayar emphasized the substantial room for the Government of India’s capital expenditure to expand by 39% YoY during the July-March FY2025 period to meet the full year’s budget estimate.

Investment and Industrial Sector Insights: The report also highlighted a slowdown in investment activity in Q1 FY2025, with the capital expenditure of the central government and 22 state governments contracting by 35% and 23% YoY, respectively. Additionally, the value of new project announcements plunged to Rs 1.2 trillion in Q1 FY2025, the lowest in two decades, while completed projects were valued at just Rs 0.5 trillion, the lowest since Q2 FY2008.

ICRA’s estimates suggest a slowdown in industrial GVA growth to 6.4% in Q1 FY2025, led by declines in manufacturing and construction sectors. However, sectors like electricity and mining are expected to record growth.

Sectoral Performance: ICRA also predicts a slight easing in the YoY expansion of services GVA to 6.5% in Q1 FY2025 from 6.7% in Q4 FY2024, driven by mixed performance across high-frequency indicators. While some indicators, such as air cargo traffic and domestic airline passenger traffic, deteriorated due to the heatwave, others related to public spending and exports improved.

In the agriculture sector, ICRA expects GVA growth to print at 1.0% in Q1 FY2025, reflecting the impact of lower output from rabi and summer crops and deficient rainfall in June 2024.

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