India’s Q3 GDP Numbers: What’s Worth Celebrating And What’s Worrying?

Expected present

India's Gross Domestic Product (GDP) grew by 6.2 per cent in the third quarter (October-December) of the 2024-25 fiscal year, aligning with expectations and higher than the 5.6 per cent growth reported in the second quarter. 

The full-year GDP growth forecast for 2024-25 has been revised upward to 6.5 per cent from the previous estimate of 6.4 per cent. After three years of very high GDP growth averaging 8.8 per cent which included the recovery from the negative growth in 2020-21, India is expected to come close to its historical average growth rates. 

Private Final Consumption Expenditure (PFCE) and Government Final Consumption Expenditure (GFCE) experienced growth of 6.9 per cent and 8.3 per cent respectively in Q3 (compared to PFCE and GFCE growth of 5.9 per cent and 3.8 per cent reported in Q2), driven by robust rural demand following a favorable monsoon and increased government spending. 

Full year PFCE is projected to grow by 7.6 per cent, an improvement from the 5.6 per cent growth observed in 2023-24. However, this implies a growth of 9.9 per cent in PFCE for Q4 2024-25 which appears to be very high. 

Similarly, Gross Fixed Capital Formation (GFCF), representing investment made in the economy, is expected to remain at 33.4 per cent of GDP in 2024-25 which is quite like the levels achieved in 2023-24 and previous years. 

Coming to some key aspects of sectoral growth:

1. Agriculture: The agricultural sector expanded by 5.6 per cent in Q3 2024-25 (compared to 4.1 per cent in Q2), bolstered by a strong Kharif crop output. The sector is projected to grow by 4.6 per cent, a notable increase from the low growth of 2.7 per cent achieved in 2023-24.

2. Manufacturing: Manufacturing growth remained subdued during this period at 3.5 per cent in Q3 2024-25, albeit it was slightly higher than the 2.1 per cent growth in Q2. The manufacturing sector is expected to grow by 4.3 per cent for the full year which is a decline from the 12.3 per cent growth recorded in the previous fiscal year. However, one should note that the growth in 2023-24 appears high due to negative manufacturing growth in 2022-23. 

Immediate challenges

--Weak urban consumption

–The FMCG sector growth as per NielsenIQ India in urban areas averaged just 3.2 per cent for the nine months period ended 31 December, 2024, while the rural growth bolstered by a strong monsoon and agricultural growth grew more than twice as fast during the same period.

–Growth in salaries has started to stagnate for employees in the private corporate sector. Between FY16 and FY20, salaries grew at a healthy pace averaging 9 per cent (adjusted for inflation). Following a dip during the pandemic, there was a substantial recovery subsequently till 2022-23.

Since National Accounts data for 2023-24 and 2024-25 is unavailable, data sourced from RBI database for listed and unlisted companies to the extent available indicates a substantial slowdown in real growth of salaries in 2023-24 and for the nine months ended 31 December, 2024.

Lacklustre corporate investments

Private corporate sector investments remained stagnant (in real terms) in 2023-24 compared to 2022-23. The growth in GFCF in 2023-24 was primarily driven by government capex. Out of the incremental increase in GFCF of Rs 5 trillion, almost Rs 3.5 trillion was from government capex alone while the rest was contributed by households.

The reasons for low growth in corporate investments would most likely be due to both domestic and external factors.

a) External factors include uncertainty due to Trump tariffs as well as excess capacity in China coupled with slowdown domestically.

b) Stagnant capacity utilization levels as per RBI surveys: Capacity utilization has remained around 74-75 per cent since 2022 and this is close to the long-term average as well.

In a situation where global merchandise export growth has remained in single digits, government policies should provide support to increase market share in overseas markets. It would really help if governments at all levels heed the advice of Economic Survey 2024-25 to “get out of the way”.

c) Declining savings rate: This has been highlighted by eminent economists like Dr. Prasanna Tantri in his interviews with Swarajya. As per National Accounts data, the savings rate has remained around 30-31 per cent in the past 10 years.

GFCF in India is primarily funded via domestic savings and without meaningful increase in savings, investment rates would not increase. Further, household savings as a per cent of GDP has remained at around 18 per cent for 2022-23 and 2023-24 compared to more than 20 per cent in the prior years. 

One of the reasons for this is the high growth in household financial liabilities from 4 per cent of GDP in 2021-22 to 6 per cent in 2022-23 and 2023-24. 

A significant part of the increase in household liabilities is from funding consumption. Pandemic stress could have also contributed to this. It is imperative that household incomes start growing faster for savings to increase. 

With slower growth in salaries, household savings may suffer more. Tax cuts in the recent budget are just a partial solution to this. Considering many of the aforesaid challenges reinforce each other, one way out would be an all-out focus on increasing exports. Along with that, incentives to promote savings from the government could kick start a virtuous high growth cycle. 

It's not that the current growth rates are bad, however, since India is aspiring to be a developed nation by 2047, growth rates should be above 8 per cent sustainably for the next decade to achieve that. 

Stronger past

Typically, First Advance GDP estimates are released in January of the financial year (e.g., the Advance Estimates for 2024-25 was released on 7 January 2025). Second Advance estimates are released in February of the financial year (it was released on 28 February).

Provisional GDP estimates would be released on 31 May, then First Revised Estimates would be released in February of the subsequent year and finally the Second Revised Estimates are released in the year after. 

A major positive surprise was the upward revision in growth rates for Second Revised Estimates (SRE) for 2022-23 and First Revised Estimates (FRE) 2023-24. 

Based on those, the GDP growth rate for 2022-23 was revised upwards from 7 per cent to 7.6 per cent and for 2023-24 from 8.2 per cent to 9.2 per cent. The net impact is that the GDP number for 2024-25 has increased by around 2 per cent (Rs 7 trillion).

Assuming the government meets the revised estimates presented in the Budget for 2024-25, the fiscal deficit would reduce by 0.1 per cent. This could make the fiscal consolidation process slightly easier and there could be positive effects on bond yields and subsequently on the interest expenses of the Government. 

The best news is that excluding the trade and transport sector, the economy has fully recovered from the impact of the pandemic. We can look at the growth in various sectors post pandemic, how they compare with each other and with the pre-pandemic trends. 

The chart below shows the cumulative growth from FY20 to FY25 (based on the Second Advance estimates), and the orange line represents the growth assuming pre-pandemic trends (based on average annual growth rates for the respective sectors from FY12 to FY20). 

At an overall level, GVA has grown by 30 per cent from FY20 levels while as per the pre-pandemic trend, the growth should have been 36 per cent (average annual growth rate of 6.3 per cent).

At an overall level, we are around 0.75 years (around 5 per cent) behind the pre-pandemic trends. Agriculture sector has grown slightly faster than the pre-pandemic trends while construction has grown the fastest and its growth is substantially above the pre-pandemic trends. 

However, the worst performer is the trade and rransport sector which has grown only by around 18 per cent since FY20. Based on pre-pandemic trends, it should have grown by 50 per cent.

Further, industry and other service sectors have grown slower than the pre-pandemic trends but nevertheless grown substantially faster than the trade and transport sector.