India’s Q4 GDP growth rises to 7.4% on robust investment demand
The investment demand remained the key driving factor during 4QFY25 as it recorded a robust growth of 9.4% YoY.
The industrial sector growth jumped to 6.5% yoy in 4QFY25, at a three-quarter high, owing to phenomenal growth in the construction and modest growth in manufacturing sector. (Image: Freepik)
Driven by strong investment demand, India’s GDP growth touched a four-quarter high of 7.4% yoy during 4QFY25, as per the recently-released national account estimates.
“This was not only higher than our expectations (6.8% yoy) but even that of the RBI (7.2% yoy) and market (consensus of 6.8-6.9%),” said Paras Jasrai, Associate Director, India Ratings and Research, commenting on 4QFY25 and FY25 GDP data.
Investment Demand Leads from Demand Side: From the demand side, the investment demand remained the key driving factor during 4QFY25 as it recorded a robust growth of 9.4% yoy (at a six-quarter high). The seasonal rush to meet their capex targets by both union and state governments along with the private sector (there has been an increase in capex intentions as per the latest NSO survey data), it appears provided succour to the investment demand in 4QFY25. The pickup in investment demand is significant but needs to be watched out for a sustainable trend in view of the economic uncertainty and the weak foreign investment demand (as indicated by the net FDI inflow).
India Ratings & Research notes the private consumption growth moderated to a five-quarter low of 6.0% yoy in 4QFY25. It appears to be due to the slowing trend at the upper-end of the income ladder. The FMCG sales volume moderated in 4QFY25 with the urban areas showing a tepid growth of 2.6% yoy which was less than a third of that of the rural areas. In addition, the sharp decline in imports also points to slow spending done by the upper end income strata. Nevertheless, the personal consumption demand has held up well (3QFY23-3QFY25: 5.5% yoy) due to the gradual catchup and recovery in the income growth of the lower strata is correcting the skewness in consumption demand. The rural real wage growth (for agriculture) remained positive for the third straight quarter in 4QFY25. In fact, it averaged 3.7% yoy (January-February 2025 as per the latest data) which was the fastest pace of growth since 2QFY20.
The government consumption expenditure declined 1.8% yoy in 4QFY25, sharpest since 1QFY22 due to the base effect (4QFY25: 6.6% yoy) and fiscal consolidation.
The exports growth (goods and services) fell to 3.9% yoy in 4QFY25 from a 10-quarter high of 10.8% yoy in 3QFY25. It continued to be led by services exports which grew sharply (in rupee terms) at 19.0% yoy, while merchandise exports (in rupee terms) were down 0.2% yoy in 4QFY25 (3QFY25: 4.5% yoy), due to low commodity prices. The imports (goods and services) contracted at a sharper pace of 12.7% yoy in 4QFY25, the most since 2QFY21. While goods imports growth fell to 5.6% yoy (in rupee terms), services imports growth decreased to 8.8% yoy (in rupee terms) in 4QFY25, each at a four-quarter low.
IT Services Powered GVA Growth During 4QFY25: The leading growth engine from the supply side was the services sector which pushed the GVA (gross value added) growth to a four-quarter high of 6.8% yoy during 4QFY25. The services sector grew at healthy 7.3% yoy. Within services, the momentum was led by ‘finance, real estate and professional services’ sector. Its growth jumped to a four-quarter high of 7.8% yoy during 4QFY25. The moderation in financial and real-estate sector activity along with the robust services exports indicates that the IT sector has led the growth in 4QFY25.
The ‘public administration and other services’ whose growth stood at a strong 8.7% yoy during 4QFY25 also helped in keeping the services sector activity intact. The other services includes education, health, art and other new age services which appears to be growing at strong pace in view of the technological changes. Trade, hotel and transportation sector growth moderated to three-quarter low of 6.0% yoy in the same period.
The agriculture sector registered a reasonable growth of 5.4% yoy in 4QFY25 (3QFY25: 6.6% yoy) due to the combination of a low base effect (4QFY24: 0.9% yoy) and good rabi harvesting. Rabi food grain production stood at 164.5 million tonnes (MT), up 2.8% yoy (at a four-year high) in FY25.
Industrial Sector Growth Jumped to a Three-quarter High in 4QFY25: The industrial sector growth jumped to 6.5% yoy in 4QFY25, at a three-quarter high, owing to phenomenal growth in the construction and modest growth in manufacturing sector. The construction sector grew at a strong 10.8% yoy (at a six-quarter high). The manufacturing sector grew at a three-quarter high of 4.8% yoy plausibly due to weak input price inflation as the volume growth had moderated to 4.2% yoy in the same period. The mining sector growth firmed up to 2.5% yoy in the same period. The electricity sector recorded modest and steady growth of 5.4% yoy.
Annual Trends: Overall, the GDP growth in FY25 came in at a four-year low of 6.5% same as the advanced estimates by NSO. Despite weakness in urban consumption, private consumption growth at 7.2% was at two-year high, it was 110bp higher than the average consumption growth during FY01-FY19 (before FY20 slowdown). The investment growth (7.1%) although declined from 8.8% in FY24, has remained robust. But it is less than half of the average growth of 14.5% during FY05-FY08.
India, the Shining Spot for the World: Going forward, while the good monsoon, monetary easing and declining inflation have brightened the prospects of another year of robust consumption growth. Investment outlook is still hazy, government has done the heavy lifting on investment since COVID-19. The high deficit, debt along with government driven investment growth can’t last forever. The private sector participation in investment hasn’t yet taken off on durable basis across sectors. The reciprocal tariff is causing its shadow over global GDP and trade growth, which may force investors to postpone their investment decision.
Weakness in global GDP and trade growth may have an impact on current account, which may pull down India’s GDP growth to some extent. However, weak commodity prices due to slower global growth will have a favourable impact on Indian GDP growth. To sum it up, India would be remaining the shining spot and the world’s fastest growing economy.
