Economics : Growth outlook improving by Elara Capital Ltd
Growth outlook improving
India’s Q3FY25 growth rebounded to 6.2% YoY versus Q2FY25 low of 5.4% YoY and tad below our estimates of 6.4%. Private consumption spending (PFCE) rose ~7% YoY in Q3, equivalent to ~60% of GDP, reflecting festival season demand and impact of higher government spending, while gross fixed capital formation (GFCF) at 5.7% YoY (at ~32% of GDP) recorded moderation. On the supply side, services growth outpaced overall GVA growth rate and the agriculture sector continued to trend up. The second advanced estimates (SAE) from NSO pegs FY25 growth at 6.5% (revised up 10bps versus first estimate). We estimate a tailwind of 15-20bps in Q4FY25E due to Maha Kumbh and expect GDP growth to be in the range of 7.1-7.2% in Q4FY25E after accounting for a possible downward revision to Q4FY24 GDP print.
We estimate full-year GDP growth at 6.4%, tad below CSO’s estimate of 6.5%. For FY26E, we retain our growth at 6.4% YoY, with external sector developments being the primary headwind. On the monetary policy front, our base-case remains of another 50bps of rate cuts (25bps cut in Apr-25). With headwinds to a sustained growth recovery above 6.5% persisting, we do not out rule out one more 25bps cut near end-FY26E as global risks persist. Cyclically, growth has bottomed out and the economy should see a steady growth momentum of 6.2-6.5% if momentum in reform picks pace.
Capital formation growth moderating for three quarters:
In contrast to the sluggish commentary from listed companies in the consumption space, growth in private spending component (PFCE) rose by ~7% YoY versus 5.9% in Q2, suggesting that at the macro level, overall demand has held. On the contrary, capital formation (GFCF) rose by ~5.7%, nearly flat versus Q2FY25. Private consumption growth outpaced capital formation growth by ~125bps in Q3FY25, three consecutive quarters of outperformance as the impact of a slowdown in government spending permeates. Pick up in central government capex in Q3FY25 (47.7% YoY versus 10.3% YoY in Q2FY25 and 24.4% in Q3FY24) supported GFCF growth at ~5.7% YoY although its share in GDP dipped to 31.9%, the lowest since Q3FY22.
Overall, consumption trends are gradually showing signs of bottoming out, underpinned by steady nominal rural wage growth of 6.2% (Q3/Q3) and gradual bottoming out of urban demand growth as tax rebate by the government, ease in policy rates and easing of macro prudential guidelines aid recovery.
Domestic business cycle has turned, external sector outlook, the key hereon:
On the supply side, growth in the manufacturing sector slightly picked pace, improving from Q2FY25 trough of 2.2% YoY to 3.5% YoY in Q3, and the construction sector value added rose by 7% YoY, easing slightly from the pace of growth seen in Q2FY25 and Q3FY24. Our business cycle models point to nascent signs of an upturn with high frequency indicators pointing to manufacturing activity picking pace in Q4 and Q1FY26E.
However, trade related uncertainties are key headwinds to recovery as operating profit growth of India’s listed companies (non-financial) has had a positive correlation of 45% with overall merchandise trade growth in the past decade. If reciprocal tariff materializes, India’s exports to the US are likely to come under pressure. Our calculations using CY23 UN and ITC trade data reveal that India faces a 2.4% tariff (export weighted) on exports to the US while applies an 18% tariff (import weighted) on imports from the US – an imbalance of ~16pps (tariff applied minus faced). Our analysis reveals that ~94% of India’s exports to US had a tariff disbalance as on CY23, of which ~USD 33bn of export items have a tariff disbalance of >10pps (43.3% of overall exports to the US). Expect ~40-70bps downside to India’s GDP growth in the event of acrossthe-board reciprocal tariffs, thus offsetting the likely benefits of personal tax rebate estimated at 43bps (Elara Estimates). The impact is likely to play out in the next 12-18 months as global manufacturing supply chains adjust to trade barriers.
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