After Q3 Slowdown, India’s Economy To Grow With Government Spending, Easing Inflation—Here’s What Morgan Stanley Predicts

India’s economy is poised for recovery in the coming months, supported by a resurgence in government spending, easing food inflation, and improving consumption trends.

After a challenging third quarter, Morgan Stanley projects GDP growth to accelerate to 6.7 per cent Year-over-Year (YoY) in the December 2024 quarter and 6.8 per cent YoY in the March 2025 quarter, up from 6.3 per cent YoY in the September 2024 quarter.

Key Drivers of Recovery

1. Government Spending Picks Up

A sharp increase in government expenditure is expected to lead to a recovery. Data indicates a significant drop in the government’s cash surplus with the Reserve Bank of India, suggesting spending surged in October and November 2024.

• Capital Expenditure Growth: Capital outlays are projected to rise by 52 per cent YoY from October 2024 to March 2025, compared to a contraction of 15.4 per cent in the first half of FY25.

• Overall Spending: Government spending growth is estimated to reaccelerate to 16.6 per cent YoY in the second half of FY25.

2. Stabilising Weather and Improved Festive Demand

Adverse weather conditions and festival timing, which had distorted economic activity in earlier months, are now behind. Excessive rainfall in August 2024 delayed construction and industrial projects, but these are expected to normalise in the upcoming quarters.

3. Easing Food Inflation

High food inflation, which peaked at 10.9 per cent in October 2024, had constrained consumer spending. As food prices moderate, urban households will regain purchasing power, driving a rebound in consumption.

4. Urban Job Market Recovery

Urban hiring, particularly in the IT sector, is showing signs of improvement. The positive impact of increased US capital expenditure in the tech sector is gradually benefiting Indian IT exports, boosting job creation in urban areas.

Challenges Faced in Q3

India’s recent economic slowdown was attributed to several factors:

1. Contraction in Government Spending: Government spending, which constitutes 28 per cent of India’s GDP, declined in the first half of FY25. Despite a budgeted 8.5 per cent YoY increase for FY25, actual spending fell by 0.4 per cent YoY between April and September 2024.

2. Weather Disruptions: Excessive rainfall in August—81 per cent above average YoY—hampered key infrastructure and construction activities. These disruptions also delayed government project rollouts.

3. Festival Timing Distortions: Shifts in major festivals like Shradh and Diwali caused anomalies in economic data, further impacting growth during the August-October period.

4. Cyclical Weakness in Consumption: High inflation and tightening credit conditions eroded purchasing power, especially in urban areas. The IT and services sectors also experienced a hiring slowdown, exacerbating consumption challenges.

Outlook for FY25

With government expenditure normalizing, weather conditions stabilizing, and inflationary pressures easing, India’s economy is set to regain its growth momentum. The combination of fiscal support, improved consumption, and recovery in urban employment will likely push GDP growth back on track for the second half of FY25.

Morgan Stanley’s projections signal optimism, with the economy expected to benefit from policy initiatives and favourable external conditions, offering a brighter outlook for the months ahead.

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