GDP Growth To Ease to 6.5% in Q2FY24-25 Doused by Heavy Rains, Weak Margins: ICRA
Moneylife Digital Team 21 November 2024
Rating agency ICRA has projected the year-on-year (y-o-y) expansion of India's gross domestic product (GDP) to dip to 6.5% in the second quarter (Q2) of FY24-25 from 6.7% in the first quarter (Q1), with heavy rains and weak margins offsetting the buoyancy injected by the turnaround in government capital expenditure and healthy trends in kharif sowing. Further, the growth in the gross value added (GVA) is estimated to ease to 6.6% in Q2FY24-25 from 6.8% in Q1, driven by the industrial sector, amid a pick-up in the expansion in services and agricultural GVA, the rating agency says. 
 
Based on available data for the Centre and the states' indirect taxes and subsidies, ICRA estimates that the growth in net indirect taxes (in nominal terms) rose slightly to about 9%-9.5% in Q2FY24-25 from 8.0% in Q1. Given this, the GDP-GVA growth wedge in real terms is expected to remain inverted in Q2FY24-25 as well, it added.
 
According to Aditi Nayar, chief economist and head for research & outreach at ICRA, Q2FY24-25 saw tailwinds in terms of a pick-up in capex after the parliamentary elections as well as healthy expansion in sowing of major kharif crops. "Several sectors faced headwinds due to heavy rainfall, which affected mining activity, electricity demand and retail footfalls, and a contraction in merchandise exports. Further, margins appear to have weakened for corporations in a variety of sectors this quarter. As a result, we project a slight dip in India's GVA and GDP growth in Q2FY24-25 to 6.6% and 6.5%, respectively."
 
"The benefits of the healthy monsoons lie ahead, with upbeat kharif output and replenished reservoirs likely to lead to a sustained improvement in rural sentiment. In addition, there is considerable headroom for the government of India (GoI)'s capital expenditure, which needs to expand by 52% in YoY terms in the second half (H2) of FY24-25 to meet the budget estimate (BE) for the full year. However, we are watchful of the impact of a slowdown in personal loan growth on private consumption as well as geopolitical developments on commodity prices and external demand. On balance, ICRA expects a back-ended pick-up in economic activity to boost the GDP and GVA growth in H2 FY2025, resulting in a full-year expansion of 7.0% and 6.8%, respectively," she added.
 
ICRA estimates the industrial GVA growth to record a broad-based moderation to 5.5% in Q2FY24-25 from 8.3% in Q1FY24-25, led by electricity (to +2.0% from +10.4%), mining and quarrying (to +1.5% from +7.2%), manufacturing (to +5.5% from +7.0%), and construction (to +7.0% from +10.5%). 
 
According to the rating agency, India's investment activity improved in Q2FY24-25 over Q1 while remaining sluggish amid slow execution of infra projects owing to surplus monsoon rains. The GoI's capital expenditure reverted to a y-o-y expansion of 10.3% y-o-y in Q2FY24-25 to Rs2.3trn (trillion), following the 35% contraction seen in Q1FY24-25 at Rs1.8trn led by the Union ministries of road transport and highways (MoRTH) and railways. 
 
While the combined capital outlay and net lending of the 22 state governments, excluding Arunachal Pradesh, Gujarat, Goa, Jharkhand, Manipur and Odisha, rose by 2.1% y-o-y in Q2FY24-25 from -20% in Q1FY24-25, the pace of expansion remained muted, ICRA says.
 
Additionally, new project announcements witnessed a healthy rebound to Rs6.7trn  in Q2FY24-25 from a multi-quarter low of Rs2.2trn in Q1FY24-25. "This was in sync with the historical trends, wherein new proposals picked up sharply in Q2 after the lull seen during the Parliamentary elections. The quarter-on-quarter (QoQ) increase in cost of announcements in Q2 FY24-25 was much stronger by the private sector to Rs5.2trn from Rs1.1trn than by the government to Rs1.5trn from Rs1.1trn. However, project completions remained subdued in Q2 FY24-25, improving marginally to Rs1.0trn from Rs0.7trn in Q1 FY24-25, partly affected by the monsoons,” it added. 
 
ICRA estimates the y-o-y expansion in the services GVA to rise to 7.8% in Q2FY24-25 from 7.2% in the first quarter amidst a mixed trend in the high-frequency indicators. Supported by the favourable trends for kharif sowing and early estimates depicting a 5.7% growth in kharif foodgrain output, as well as a low base, ICRA expects the GVA growth of agriculture, forestry and fishing to accelerate to around 3.5% in Q2FY24-25 from 2.0% in Q1FY24-25.
 
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