The GDP numbers for Q2FY25 came as a major surprise as no forecaster predicted a figure close to 5.4%. But there are several positives when one looks closer. Sector-wise analysis shows that four of the eight did better than last year while one recorded high growth on a high base, though numerically lower.
Thus, higher growth can be expected in Q3, when the crop is harvested. Add to this the high reservoir levels, and this means that the rabi crop can be expected to be very good in the absence of any weather shocks in March-April. Hence, the rural story can only get better in H2, which is positive for consumption. This bodes well for fertilisers and other inputs on the supply side and two-wheelers, tractors, electronics, and consumer goods on the demand side.
Second, the services sector has posted higher growth rates this quarter. The trade, transport, hospitality, and communication segments grew by 6% over 4.5% last year. This is indicative of the spending seen this quarter, which will only accelerate in the coming months. There has been a major push in the “experience spending” by households this season, which will manifest in continued expansion. The Q2 numbers do not capture the festive spending, which has shown enhanced sales both in physical outlets as well as e-commerce sites.
The finance and real estate sector grew by 6.7% compared to 6.2% last year. It should be remembered that this was also the period of slower growth in bank deposits as savers migrated to capital markets, keeping growth subdued. This had been reversed subsequently, and higher growth can be expected in H2. Further, the economy is now in the conventional busy season, where demand for credit picks up. This can be seen in the rather stable growth in credit to large industry as of October. Therefore, higher growth in this segment may be expected in Q2.
The third component — public administration, personal services, and defence — recorded the highest growth rate of 9.2% across the sector over 7.7% last year. A significant component here is government expenditure, which was subdued in November. In fact, government spending was slow in the first few months of the year and has picked up quite sharply in the last couple of months. This means that the tempo of growth will be maintained as the different departments work to meet expenditure targets.
Therefore, the picture on two major segments — agriculture and services — is positive, with little apprehension. Then where has the problem been? The value added from construction was lower at 7.7%, which is impressive as it follows 13.6% growth from last year. Prospects here are linked with both road construction (in the government’s purview) as well as housing, which witnessed a lull in September but has since picked up during the festive season. This means that the underperformer has been industry, which includes mining, manufacturing, and electricity.
In case of mining and electricity, growth was 0.1% and 3.3% respectively. Here, the base effects were stark, at 11.5% and 11.1% respectively. While these segments did pull down overall growth in industry and GDP, the statistical base effect did play a role. These statistical effects are important insofar as future growth rates of segments in industry and services can be influenced by them, as the overall economic growth was high at 8.2% last year.
In fact, electricity consumption was high in Q2 until mid-August due to extreme heat conditions in several states, pushing up demand, which does not get captured. Further, mining typically slows down during monsoon. It can be expected that production would get better in H2.
This leaves manufacturing, which has been the major under-performing sector. It has a weight of 17-18% in gross value added (GVA). Here, the performance has been K-shaped, with some sectors doing well and others lagging. This is revealed in the profit and loss accounts of companies for Q2. This has been the single most important factor for pulling down growth, as profitability has been low at the aggregate level. Sectors such as steel, refinery, chemicals, etc. have recorded lower growth in profits, which has affected value addition.
The government too has done some subsidy front-loading this quarter, as can be seen in the monthly budgetary accounts. This has created a negative wedge between GVA and GDP growth. Therefore, while the Q2 numbers are a negative surprise, the internals reveal stable growth in several segments. Consumption growth at 9.6% in nominal terms is higher than that of nominal GDP growth, which is a positive sign.
Based on farm prospects as well as the government’s aim to meet budgetary outlays, H2 growth would be higher. The risk factor would be corporates, also facing rising input costs. Besides, the base effects of high growth of 8.6% and 7.8% in H2FY24 will also affect the future growth numbers. Based on the buoyancy seen in services in particular and a possible rebound in industry to an extent, growth of around 7.5% in H2 cannot be ruled out. This can make the overall growth average around 6.6-6.8%, which, though lower than earlier projections of above 7%, would provide a base for stronger growth in FY26.
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