INDIA: FY25 & Q4FY25 GDP Update - A Solid Q4 Caps off stable Growth in FY25 by SBI Capital Markets
EXECUTIVE SUMMARY
Real GDP grows by 6.5% y/y in FY25 as per PE, slightly higher than market consensus on jubilant private consumption and resurgent government capex
Growth was presaged on healthy PFCE, which surged by 7.2%, well above 5.6% growth seen in FY24. This is in line with indicators which showed buoyancy in airport footfalls, services PMI, and UPI transaction volume in FY25. Growth went beyond just one engine, with a continuation in GFCF growth on a high base auguring well for the economy, especially in light of underperformance in 9MFY25 and moderation in private capex intent. Growth in GFCE sharply slowed down to 2.3% from 8.1% seen in FY24, indicating that pandemic era largesse is now firmly in check despite increased allocations towards select schemes in the Union Budget.
Real GVA for FY25 expands by 6.4% y/y helped by outperformance in construction and select services
Services GVA surged ahead by 7.2%, faster than headline GVA for the third consecutive fiscal. Public administration, defence, and other services jumped by 8.9%, the highest pace of growth in 8 years. Fair momentum was seen in financial services too, with banks headed towards another year of record profits, even as a high base limited their growth. Industry GVA sharply slowed to 5.9% from 10.8% in FY24, largely attributable to manufacturing sluggishness – which was evident from disappointing IIP numbers coming out. A positive surprise was delivered by construction, which continued to grow handsomely (at 9.4%) despite being on a high base of the past three years. Even as the share of agriculture in GVA continues to decline secularly from 18.5% in FY12 to 14.4% in FY25, it posted a decent 4.6% helped by excellent food crop production.
Q4FY25 GDP delivers a bonanza with lead over GVA helped by sharp reduction in subsidy payments
By far the biggest surprise was Q4FY25 GDP shooting up by 7.4% y/y, well above expectations of 6.7%, with Q3 numbers also being revised upwards. GVA growth was more sombre at 6.8% in the same period. The vast difference between the two may be contributed by a 12.7% growth in net taxes as sharp rise in taxes (gross GST revenues rose by 9.4% y/y in FY25) was met with tepidity in subsidy payouts (indicated by degrowth in GFCE by 1.8%). The drivers for growth in Q4FY25 were vibrant construction activity, sharp rise in GFCF (up 9.4% y/y in real terms, highest growth since Q2FY24), and a precipitous decline in imports helped by low crude prices. The momentum in quarterly augurs well for the future.
India ready to be the fastest growing major economy for yet another year in FY26 as holistic fiscal and monetary stimulus sustain multiple growth pistons
FY26 could see PFCE rise helped by a much-needed tax break given to the middle class. Rural prosperity would be helped by an above-normal rainfall though the spatial and temporal distribution could play a role like they did in Q2FY24. Limp commodity prices will help keep external balances in check, with hefty forex reserves and efficient management standing guard in any case. The exceptional monetary space afforded by the RBI in light of controlled inflation must continue to quench investment needs. The same would also be important in efficient in transmitting the 2-3 rate cuts likely from the RBI, as well as steepness of the yield curve. A deterioration in growth outlook could push the RBI towards the 3rd cut
Some haziness on the horizon from global factors likely to curb FY26 growth below FY25 level
Economics being a dismal science, it is customary to end on a word of caution. While domestic drivers appear infallible in FY26, global clouds are dark. Uncertainty over tariffs is keeping commodity markets on their toes, pushing off already fickle private capex intent (with NSO expecting 26% lower level in FY26 vs. FY25). The art and science of the deal being yet unknown, there could be a stiff challenge to exports, especially if the US sinks into slowdown. The IT sector is already murmuring with discontent. Nevertheless, we believe that real GDP growth in FY26 will hold at 6.2% y/y. Nominal GDP will remain challenged in FY26 as inflation sinks, and we expect a 9% y/y figure to register
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