Mixed Outlook
India’s economy showed signs of resilience in the third quarter of the fiscal year 2024-25, growing at 6.2 per cent from October to December. This marked an improvement from the 5.6 per cent recorded in the previous quarter but was notably slower than the 9.5 per cent growth seen during the same period in 2023. While the numbers reflect a steady recovery, they also highlight the challenges that lie ahead in sustaining high growth. The latest data released by the National Statistical Office suggests that rising government spending and strong private consumption have been the key drivers of this growth. Government expenditure saw an 8.3 per cent increase, while private consumption grew by 6.9 per cent, helping the economy regain momentum. Exports also performed well, expanding by 10.4 per cent, while imports saw a slight decline, which some experts attribute to the weakening rupee.
However, the picture is not entirely rosy. Investment growth, a crucial factor for long-term economic expansion, slowed down. The Gross Fixed Capital Formation, which measures investment in assets like infrastructure and machinery, grew at just 5.7 per cent, registering a sharp drop from 9.3 per cent a year ago. This suggests that while government spending is picking up, private investment remains cautious. Looking ahead, the government has set an ambitious target of 6.5 per cent GDP growth for the entire fiscal year, which would require a sharp acceleration to 7.6 per cent in the final quarter. While officials remain optimistic, many economists feel this is overly ambitious. Some point out that global risks, such as tightening financial conditions and unpredictable trade policies, could dampen growth. Others highlight that sustained private investment and manufacturing growth are necessary for long-term stability.
Sector-wise, agriculture has emerged as a bright spot, growing at 4.6 per cent due to a strong kharif crop season. The rural economy seems to be on solid ground, and expectations for a good rabi harvest could further support demand. On the other hand, manufacturing remains sluggish, growing at just 4.3 per cent, reflecting weaker corporate profitability and subdued urban consumption due to inflationary pressures. The services sector, which has been a strong pillar of India’s economy, is also slowing down, growing at 7.3 per cent compared to 9 per cent last year. The government’s capital expenditure has increased, but private sector investment remains weak. The investment-to-GDP ratio has fallen to a three-year low of 31.9 per cent, despite a significant rise in public sector spending. This suggests that private companies are still hesitant to make large investments, possibly due to uncertainties in demand and global economic conditions. While the government’s spending can provide a temporary push, private sector participation is essential for sustainable growth.
Another challenge is inflation, which, while moderating, continues to impact urban demand. Companies in the consumer sector have noted that inflationary pressures have pushed back discretionary spending, affecting overall economic activity. While some relief is expected in the coming months, achieving the targeted growth rate will require a significant uptick in both private consumption and investment. Despite the concerns, India’s growth trajectory remains one of the strongest among major economies. The post-pandemic recovery has been underestimated in previous estimates, with recent revisions showing healthier nominal growth rates. A higher nominal GDP also means a potential reduction in fiscal deficit, giving the government some room to support the economy through targeted spending. With global uncertainties still looming and domestic investment yet to pick up significantly, the path ahead remains challenging. However, with steady policy support and a revival in private sector confidence, India’s economic story could still maintain its upward trajectory.
