Will the 5.4% GDP growth shocker reverse or accentuate?

Given the state of play in the economy and the underlying weak dynamism, India’s GDP growth is likely to be in the range of 5.5% to 6.5% in FY2025.

The second quarter 2024-2025 (Q2 FY2025) GDP growth of 5.4% has shocked most institutions, analysts, and observers. The government has felt disappointed but is not alarmed. The Reserve Bank of India (RBI), most bullish about 7-plus percent growth in FY2025, has not yet spoken.

The 5.4% GDP growth has brought down half-yearly (H1 FY2025) growth to 6%. Most agencies have begun understandably reducing their 2024-2025 growth projections.

Why has the GDP slowed down so sharply in Q2 FY2025? What does it entail for FY2025 growth? Can the downward trend reverse in H2? Or, will it accentuate further?

It was waiting to happen

From the production side, the GDP growth comes from two factors — first, gross value added (GVA) of all the goods and services produced, and second, net taxes i.e. excess of taxes on goods and services like GST over subsidies. Roughly 90% of the GDP comes from GVA and 10% from net taxes.

Last year in Q2 FY2024, many constituents of the GVA had recorded fabulous growth (mining and quarrying 11.1%, manufacturing 14.3%, utilities 10.5%, and construction 13.6%). The momentum in these sectors has been visibly coming down, which resulted into grossly underwhelming growth in Q2 FY2025: (-)0.1% in mining, 2.2% in manufacturing, 3.3% in utilities, and 7.7% in construction.

Slowdown in these sectors was evident. Growth of both sales and profits of real estate sector companies have come down massively. Corporate tax receipts of the government were down in dump (Rs 2.87 trillion in Q2 FY2025 against Rs. 3.13 trillion in Q2 FY2024, a decline of 8.33%). Electricity and gas production was visibly low. Construction was slowing down, partly on account of insipid capex both in government and private sector.

Net taxes also contributed its part in growth slowdown. Against growth of 12.7% in Q2 FY2024, net taxes growth is only 2.7% in Q2 FY2025.

Half-year growth decline alarming

The H1 FY2025 growth of 6% is one-fourth lower than 8.2% growth of H1 FY2024. In addition to underperforming sectors of Q2 FY2024, the trend in services is also worrying.

Growth in trade, hotels, transport, communication, and services relating to the broadcasting sector is down from 6.9% in H1 FY2024 to 5.9% in H1 FY2025.

The roaring growth engine of financial services (which includes banks and non-banks), real estate (both commercial and residential) and professional services (which includes IT services and the fast-growing global capability centres (GCCs)) declined massively from 9.3% in H1 FY2024 to 6.9% in H1 FY2025.

The financial sector profits have peaked and real estate is showing signs of halting progress. The slowing financial sector should have rung the alarm bells.

The decline in net taxes growth in H1 FY2025 — 3.3% against 10.5% in H1 FY2024 — is equally alarming.

What does H2 FY2025 entail?

The evidence suggesting challenging times ahead is stark.

In Q3 and Q4 of FY2024, GDP growth was 8.6% and 7.8% respectively, which is certainly humungous and challenging in the current context.

A bigger and more onerous challenge is net taxes dynamics. A sharp fall in H2 FY2025 is staring us in the face. In H2 FY2024, the net taxes amounted to Rs 8.85 trillion against Rs 7.03 trillion in H2 FY2023, leading to an unprecedented growth of 25.9%; much higher than the H1 FY2024 high growth of 10.5%.

The government’s indirect tax receipts growth has slowed down. There is no likelihood of product subsidies going down in FY2025. There is no way that the government will, therefore, achieve growth in net taxes in H2 FY2025. Most likely, there will be a significant contraction in net taxes. This will certainly drag the second half GDP growth a fair bit.

Downward pressures in the GVA growth are persisting in all sectors, except agriculture. The loan growth is also on a visibly downward trajectory. If the RBI cuts the repo rate (which it should on merit), the banks’ GVA contribution will come down in Q4 FY2025. Manufacturing growth will be far lower than the big growth of 10-plus percent in H2 FY2024 considering the corporate results and the index of industrial production (IIP) growth languishing at less than 5%. There will be much lower growth in construction as well against 9.1% growth in H2 FY2024.

All said, H2 FY2025 is likely to be as challenging and underwhelming as the H1 FY2025, if not more. A very low growth of 1.65% in government’s gross tax revenue (GTR) in October underlines the challenging environment.

The expenditure side story — private consumption, gross fixed capital formation, and net exports (exports minus imports) — is no different. In fact, the weak dynamism of the expenditure side is fully reflected in the under-performance of the supply side.

Reversal or acceleration?

Given the state of play in the economy and the underlying weak dynamism, there is no likelihood of India’s GDP growth exceeding 7% in H2 FY2025. A 7% growth will give India GDP growth of about 6.5% in FY2025.

There is good likelihood that India’s GDP growth in H1 FY2025 will slip below 6% but is highly unlikely that it will fall below 5%. A 5% growth in H2 FY2025 will lead to India’s GDP growth falling to 5.5% in FY2025. The likelihood of H2 FY2025 growth turning out to be closer to 6% is much more, which will imply a GDP growth of 6% in FY2025.

On net basis, India’s FY2025 GDP growth will be in the range of 5.5% to 6.5%, with, to use RBI/IMF speak, the risks tilted downside.

(Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream’ and ‘We Also Make Policy’.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.