India GDP Preview: Slowing Growth, Solid Prospects

India's economic momentum has encountered a deceleration in the April-June quarter of 2024 (Q1 FY25), in our view. The GDP is projected to have grown by 7% in this period, a noticeable drop from the 7.8% recorded in the previous quarter. This marks the slowest pace of growth in a year, driven primarily by a reduction in government spending linked to the national elections concluded in June.

Slowing Growth, Steady Fundamentals

In the quarters leading up to the elections, India's GDP growth consistently surpassed the 7% mark, buoyed by robust capital expenditure from the government under Prime Minister Narendra Modi. This spending surge was a strategic move to secure a third term in office, which was successful despite the ruling Bharatiya Janata Party (BJP) losing its outright majority in the lower house. The election-related pause in public spending has temporarily dampened the growth outlook. However, private consumption and manufacturing sectors have shown resilience, maintaining a steady performance. Notably, private consumption—responsible for over 50% of GDP—experienced a modest revival, offering a silver lining amidst the broader slowdown.

Looking ahead, India's economic growth is anticipated to moderate, with projections suggesting an average growth rate of 7.0% for the full fiscal year. This outlook, while slightly subdued, still positions India as one of the fastest-growing major economies globally. A key factor to monitor will be the sustainability of the private consumption revival. 

Inflation and Consumer Confidence

Inflation remains a pivotal element in the economic narrative. Consumer price inflation, which stood at 3.54% in July, is expected to average around 4.6% for 2024. This relatively moderate inflation rate could support consumer spending, though a significant recovery in real consumption is not expected for several more quarters. Meanwhile, urban consumer confidence has shown unexpected weakness, as indicated by the Reserve Bank of India's Consumer Confidence Survey. Combined with the lingering effects of last year's poor monsoon and a mixed start to the 2024 monsoon, rural sentiment has also been subdued. This complex interplay of factors suggests that any robust improvement in domestic demand is likely to be gradual.

Government Expenditure and Future Growth

The contraction in government capital expenditure during the April-June quarter has been a significant drag on growth. However, there is considerable scope for a rebound. To meet its full-year budget targets, the government will need to ramp up capital expenditure by 39% year-on-year in the remaining months of FY25. This anticipated surge in spending could propel GDP growth back above 7% in the second half of the fiscal year.