Indian economy grows faster than expected in fourth quarter. But near-term outlook remains unclear

Indian Express

2 days ago

The Indian economy grew at a robust 7.4 per cent in the fourth quarter of 2024-25, surpassing most expectations. Growth for the full year has now been pegged at 6.5 per cent by the National Statistics Office. This is in line with the office's earlier estimates. Strip away net taxes on products and value added by the economy grew by 6.8 per cent in the fourth quarter. Moreover, notwithstanding the sharp pick-up in growth in the second half of the year — the momentum slowed down sharply in the second quarter when growth collapsed to just 5.6 per cent — the Indian economy has actually slowed down significantly in 2024-25. Nominal GDP has also come in at less than 10 per cent. And forecasts for next year aren't much brighter.
The sector-wise disaggregated data shows that agriculture continued to expand at a healthy pace, driven by favourable weather conditions and remunerative prices, which induced farmers to sow more area. Growth of 5.4 per cent in the fourth quarter has put the sector's growth for the full year at 4.6 per cent — higher than its long-term average. This bodes well for rural consumption. The industrial sector, though, slowed sharply, weighed down by manufacturing. The sector grew at just 4.5 per cent in 2024-25, down from 12.3 per cent the year before. Construction, however, continued to witness steady growth, expanding at 9.4 per cent in 2024-25, after growing by 10.4 per cent the year before. The services sector also witnessed a slight deceleration, with trade, hotels, transport and communication as well as the financial, real estate and professional services segments growing at a slower pace than before. The GDP data also show that private consumption grew at 7.2 per cent last year. This is difficult to reconcile with some of the commentary from India Inc, which, through the last year, voiced concerns over a softness in demand and a shrinking middle segment. There are also questions over the sustainability of the sharp pick-up in investments in the fourth quarter — gross fixed capital formation grew at 9.4 per cent as per the latest data.
The near-term outlook is unclear. There is a possibility that lower commodity prices will impact the deflator in the coming quarters. Some analysts expect investment activity to be weighed down by the prevailing uncertainty. But a combination of tax cuts and lower interest rates could help support household consumption — there are expectations of the RBI's Monetary Policy Committee cutting interest rates further with inflation likely to stay in line with the central bank's target. But expectations for a strong pick-up this year remain muted. The central bank has pegged growth at 6.5 per cent in 2025-26 and the expectations of some analysts also range between 6.2 per cent and 6.5 per cent.