India GDP : Gains momentum in H2 FY25 By JM Financial Services
Gains momentum in H2 FY25
Real GDP growth of 7.4% in Q4FY25 and 6.5% in FY25 surprised on the upside but was inline with the Government and RBI’s projection. Economy gradually picked up after bottoming out in Q2FY25, Investments and government consumption were the key drivers while private consumption dragged. The pickup in H2 FY25 reflects the effectiveness of the monetary policy through rate actions as well as liquidity injections. However resilient growth would restrict RBI’s ability to cut rates beyond 50bps, as signalled by the uptick in benchmark yields. Government’s capex intensity improved substantially in Mar-25, meeting its budgeted target at the cost of slight fiscal deterioration. Our terminal rate expectation reverts to 5.5%. We expect growth in the range of 6.3-6.5% in FY26, provided India inks favourable trade deals in the upcoming months.
* Growth beats estimates: GDP growth of 7.4% in Q4 FY25 surprised on the upside as markets were building in growth of ~6.8%. Growth was majorly driven by Industry, while Agri and services dragged. On an annual basis, economic growth met the government and RBI’s estimates of 6.5% for FY25 in real terms. Nominal growth of 9.8% in FY25 is marginally lower than the budgeted estimates, hence its impact on the fiscal deficit target of 4.8% was negligible. It is pertinent to note that the GDP deflator trended in tandem with the WPI inflation (Ex 5). We believe that changing growth-inflation dynamics in favour of the former, restricts the RBI’s ability to ease further beyond 50bps in this cycle, hence our terminal rate expectation reverts to 5.5% as base case. Further easing would be in response to any sluggishness in the economy.
* Private consumption dragged in H2: On a broader level, if we break-up the performance in two halves, it is evident that investments (GFCF) and Government consumption picked up pace in H2FY25 while moderation in private consumption proved to be a major drag on the economy, sharp decline in imports aided growth. While on the supply side, weakness in the industrial activity pulled the overall performance lower even as Agri and service activities remained resilient (Ex 3 & 4). However the gradual pickup in quarterly GDP, indicates that bottom has formed in Q2FY25 (Ex 1). Private consumption has been patchy in last one year, however improving rural wages should support rural demand in the upcoming months. It is worth highlighting that the performance in Q4 FY25 was after considering the upward revision in the base quarter (Q4 FY24, Ex 7 & 8).
* Capex intensity picks up in FY26: India’s fiscal situation marginally deteriorated to 100.5% of FY25RE, as receipts fell short of the revised target of INR 31.5Tn by 2.2% while a shortfall of 2.6% in Revenue spending aided in accommodating the higher capex of INR 10.52Tn (103.3% of FY25RE). The significant pickup in the capex intensity in FY25 was noteworthy, which is carried forward in the current fiscal as well. Capital expenditure of INR 1.6Tn was robust in Apr-25 considering it forms 14.3% of the budgeted estimates for FY26. A closer look reveals that while spending in Roads (20.3% of FY26BE) and Railways (12.3% of FY26BE) was robust, Defence lagged with just 2.4% of full year target (Ex 14). Government has set the fiscal deficit target of 4.4% of GDP for FY26, however it’s the capex intensity which would be closely monitored in FY26.
* Expect growth in the range of 6.3-6.5% in FY26: The positive surprise in the GDP growth was both in case of Q4 as well as for fiscal 2025, the annual growth was in line with RBI and government’s projection. This vouches for the effectiveness of the monetary policy through rate action as well as the liquidity injection measures. However the healthy growth would restrict RBI’s incremental rate cuts to 50bps in this cycle, unless the central bank targets a higher potential domestic growth. The slight uptick in benchmark yields (4- 5bps) post the release of Q4 GDP data, reflects the unwinding of incremental rate cut expectation. For the upcoming year, we expect growth in the range of 6.3-6.5% considering the headwinds which could emanate through the trade route, provided India inks favourable deals in the upcoming months. Our terminal rate expectations reverts to 5.5% vs 5.25% earlier.
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