Building on a strong base

The takeaway from GDP numbers is that India’s macroeconomic fundamentals remain intact. Policy makers deserve much of the credit

The Indian economy grew at 6.5% in the fiscal year 2024-25 and 7.4% in the quarter ending March 2025. Both these numbers are higher— the latter much more than the former — than the 6.3% and 6.8% projection by a Bloomberg poll of economists. Is the state of the economy much better than what the pundits thought it to be? A more informed answer requires looking beyond the headline print. Gross Value Addition (GVA) growth in the quarter ending March 2025 is 6.8% compared to the Gross Domestic Print (GDP) print of 7.4%. This means that fiscal consolidation, most likely a reduction in subsidy payments, has generated significant tailwinds for the GDP. To be sure, the GVA and GDP growth difference is much lower (0.1 percentage point) in the 2024-25 annual number.

The biggest X factor for the economy, however, remains unchanged as far as the past few years are concerned. Will private capex finally gain momentum and emerge as the key driver of a sustained growth revival? (AFP)

The larger takeaway is that the Indian economy is pretty much on the same trajectory as was believed to be the case before Friday’s data was released. The second advance estimates released on February 28 projected an annual GDP growth of 6.5%. If RBI’s Monetary Policy Committee (MPC) April 2025 forecasts — they were made after Donald Trump’s “Liberation Day” tariff announcements and saw a downgrade by 0.2 percentage points from the February forecasts — are to be believed, the growth rate will remain the same as 2024-25’s 6.5% in the fiscal year 2025-26. These numbers should disabuse us of the notion that things have changed drastically on the economic front in the past couple of months. With this caveat in place, what is the larger economic picture?

India is still the fastest growing major economy in the world. If International Monetary Fund (IMF)’s projections are to be believed, it will become the fourth-largest economy in the world by the end of this fiscal year. However, the fact is also that growth has slowed from its initial post-pandemic rebound. This is to be expected as pent-up demand dissipates. Also, fiscal consolidation is in the works and government capex tailwinds might have peaked. That all this is happening along with an unprecedented turbulence in the global economy, thanks to Trump’s trade policy shock, might add to downside risks to growth. To be sure, this is not to say that there are no tailwinds going forward. Private Final Consumption Expenditure (PFCE) has grown at 7.2% in 2024-25 compared to 5.6% in 2023-24. Given that we are now in the middle of a monetary easing cycle, personal consumption could gain further momentum. The upward revision in income tax slabs in the budget — basically a boost to net disposable incomes — should also help. However, both Government Final Consumption Expenditure and Gross Fixed Capital Formation have lost growth momentum — 2.3% compared to 8.1% and 7.1% compared to 8.8% — between 2023-24 and 2024-25.

The biggest X factor for the economy, however, remains unchanged as far as the past few years are concerned. Will private capex finally gain momentum and emerge as the key driver of a sustained growth revival? The jury is still out on this question and this is one issue where the so-called animal spirits will matter more than a policy intervention. Given the global economic turbulence, recovery of private capex will depend a lot more on the domestic market than export prospects and it is better to maintain a sober outlook.

What cannot be overemphasised enough is the fact that India’s macroeconomic fundamentals remain intact and policy making deserves a lot of credit for this. Things could have been significantly worse had this not been the case