India’s economic growth expectedly slows to 6.7% in Q1 — lowest in the last five quarters

In the financial year ending March 2024, as almost all the major economies across the world reported some slowdown, India remained the only outlier with a remarkable GDP growth rate of 8.2%. But, given the election season, unrelenting heat waves, and a global slowdown, most experts predicted that the growth in the first quarter of this financial year (FY 2024-25) would be much lower. And the projections have turned right!

According to the Central Government’s National Statistical Office (NSO) — India's economic growth decelerated to a 15-month low of 6.7% in the April-June period or the first quarter of this financial year (FY 2024-25).

The slowdown is primarily attributed to the weaker performances in the agriculture and services sectors, according to government data released on Friday. Lower capital expenditure from the government due to the Lok Sabha elections also meant that the Government of India’s fiscal deficit dropped by over 50% Rs. 6.1 trillion in Q1 FY2024 to Rs. 2.8 trillion last quarter.

This marks a significant decline from the 8.2% growth recorded in the same quarter of the previous year, FY2023-24. The previous low for GDP growth was 6.2%, recorded five quarters ago from January to March of 2023.

Despite the slowdown, India maintained its position as the fastest-growing major economy, with China posting an even slower growth rate of 4.7% during the same period.

"Slowdown not a cause for alarm"

ICRA's Chief Economist, Aditi Nayar, noted that while GDP growth slowed in the first quarter of FY2025 compared to the last quarter of FY2024, gross value added (GVA) growth unexpectedly accelerated to 6.8% from 6.3%. "This divergent trend was led by the normalization of growth in net indirect taxes, and the slowdown in GDP growth is not a cause for alarm, in our view," Nayar added.

Earlier this month, the RBI governor projected a 7.1% growth for Q1 and 7.2% growth for the entire FY2024-25. The central bank attributed this strong outlook to factors like improved agricultural activity, robust services, healthy bank and corporate balance sheets, government capex, rising private investment, and better global trade prospects. However, the RBI slightly had moderated its growth projections due to lower-than-expected corporate profitability, government spending, and core industries output.

Real GDP at constant prices in Q1 of 2024-25 is estimated at ₹43.64 lakh crore, up from ₹40.91 lakh crore in Q1 of 2023-24, reflecting a growth rate of 6.7%. The nominal GDP at current prices in the same period is estimated at ₹77.31 lakh crore, compared to ₹70.50 lakh crore in the previous year, marking a 9.7% growth rate.

Earlier this month, the government data showed that the year-on-year inflation rate based on the Consumer Price Index (CPI) for July 2024 moderated to 3.54 per cent — the lowest since August 2019! Given the falling inflation and slowing economic growth, investors are hoping for an early rate cut from the Reserve Bank of India (RBI) by October if the trend sustains.

Construction and defence lead

The agriculture sector's GVA growth decelerated sharply to 2% from 3.7% in the April-June quarter of 2023-24, and the financial, real estate, and professional services sector also saw a slowdown, with GVA growth dropping to 7.1% from 12.6% in the same period last year. However, the manufacturing sector showed resilience, with GVA growth accelerating to 7% from 5% in the previous year.

Other sectors showed varied performances: the mining and quarrying sector's GVA growth accelerated slightly to 7.2% from 7% a year ago, while the electricity, gas, water supply, and other utilities surged by 10.4% from 3.2%. The construction sector also posted strong growth, expanding by 10.5% from 8.6% in the previous year. However, trade, hotels, transport, communication, and services related to broadcasting saw a slowdown, with GVA growth declining to 5.7% from 9.7% a year ago.

Nayar pointed out that the higher-than-expected GVA growth in Q1 FY25 was largely driven by sectors such as construction, public administration, defence, and other services, along with agriculture. She noted, "The acceleration in the construction GVA growth to 11.6% in Q1 FY25 from 8.5% in Q4 FY24 is particularly surprising given that the volume growth in construction-related indicators had slowed between these quarters."

Public administration, defence, and other services grew by 9.5%, up from 8.3% in the same quarter last year. Real GVA in Q1 of 2024-25 is estimated at ₹40.73 lakh crore, up from ₹38.12 lakh crore in the corresponding quarter of 2023-24, indicating a growth rate of 6.8%, while nominal GVA is estimated at ₹70.25 lakh crore, up from ₹63.96 lakh crore, reflecting a growth rate of 9.8%.