GDP growth in FY25 may hit 4-year low. Is Indian economy losing steam?

India’s economic growth is expected to slow sharply to 6.4% in FY25, according to the first advance estimates released by the government. The projection marks a considerable drop from the 8.2% growth achieved in FY24 and represents the slowest pace of expansion in four years.

The estimate is also lower than the Reserve Bank of India’s (RBI) revised annual growth forecast of 6.6%, raising concerns across sectors. While a slowdown in the ongoing financial year was anticipated, the steep downward revision has taken many by surprise. So, what factors are driving this deceleration in GDP growth?

SECTORAL GROWTH MODERATION

Dr. Manoranjan Sharma, Chief Economist at Infomerics Ratings, explained, “India’s GDP is expected to grow by 6.4% in FY25 over 7.2% in FY24. This slowest growth rate since the pandemic manifests moderation across key sectors and constitutes a significant drop from the 8.2% growth in FY24.”

While agriculture is poised for a noticeable improvement with a growth projection of 3.8% compared to 1.4% last year, other key sectors are forecast to slow. Manufacturing growth is projected to fall to 5.3% from 9.9%, while mining is expected to grow at 2.9% compared to 7.1%.

Similarly, the construction sector is set to grow at 8.6%, down from 9.9%, and electricity growth is estimated at 6.8%, lower than the previous year’s 7.5%.

The top contributors to GDP, such as manufacturing, trade and hotels, and financial services and real estate, are all expected to witness slower growth in FY25. Urban consumption has also been hit hard, with inflation eroding the purchasing power of the urban poor.

“Decelerating GDP growth, together with persistent inflation, would make the RBI’s task of managing the growth-inflation trade-off odious,” added Dr. Sharma.

CHANGING CONSUMER PREFERENCES

Dr. VP Singh, a director at Great Lakes Institute of Management, highlighted the impact of evolving consumer behaviour on economic growth. “Premiumisation is the flavour of the day. The industry will have to quickly adapt to changing tastes,” he noted.

Singh pointed out that subdued sales in the FMCG and auto sectors are not merely a result of low incomes. “The entry of brands like MG Hector and KIA in 2018 and the surge in Parle-G sales during COVID indicate that poor sales stem more from shifting preferences than income constraints,” he said.

These shifts in consumer behaviour underline a broader transition in India’s consumption landscape, which may weigh on GDP growth in the short term but could offer opportunities for industries willing to adapt quickly. “The country is undergoing a change in preferences, and the industry will soon incorporate these changes, leading to more robust GDP growth,” Singh added.

IMPACT ON STOCK MARKETS AND BROADER ECONOMY

Ajit Mishra, SVP, Research, Religare Broking Ltd, highlighted the potential market impact of the revised GDP forecast. “India’s GDP growth projection of 6.4% for FY25 could temper investor sentiment, as lower growth expectations might lead to reduced corporate earnings forecasts, prompting portfolio adjustments,” he said.

Sectors closely tied to economic growth, particularly manufacturing, may see notable declines. However, Mishra suggested that “effective government fiscal measures or potential interest rate cuts by the RBI could offer some relief.”

A sustained slowdown in GDP growth could also affect foreign institutional investor (FII) sentiment. Mishra noted, “Slower economic growth often raises concerns about corporate profitability and market stability. If FIIs identify more favourable opportunities elsewhere, they may reduce their exposure to Indian equities.”

That said, India’s long-term appeal remains intact due to its demographic advantage, strong consumption trends, and resilient financial markets. External factors such as global economic conditions and geopolitical tensions will also play a role in shaping FII behaviour.

Nominal GDP is expected to grow by 9.7% in FY25, slightly higher than the 9.6% seen in FY24. However, the broader economic outlook will rely heavily on the government’s fiscal policies and the RBI’s approach to managing inflation and growth.