India’s Q2 FY25 GDP Growth Slows to 5.4%: Key Insights and Analysis

India’s economic growth fell to 5.4% in the second quarter of FY25, a significant drop from 7.6% during the same period last year and 6.7% in the April-June quarter, according to data released on Friday.

Despite this slowdown, India retained its position as the fastest-growing large economy globally. The decline of the GDP growth was attributed to poor manufacturing and mining performance and weak consumer spending.

The fiscal deficit for April-October stood at ₹7.5 trillion ($88.79 billion), 46.5% of the annual target for FY25. The GDP growth figures underscored a slowdown not seen since the 4.3% growth recorded in Q3 FY23 (October-December 2022).

Private final consumption expenditure (PFCE) growth decelerated to 6% in Q2 FY25, compared to 7.4% in the previous quarter.

Sectoral Challenges and Bright Spots

Chief Economic Advisor V. Anantha Nageswaran called the 5.4% GDP growth “disappointing” but highlighted agriculture, allied sectors, and construction as bright spots.

Agriculture’s GVA (Gross Value Added) grew by 3.5%, up from 1.7% a year ago, while construction expanded by 7.7%, albeit slower than the 13.6% growth recorded last year.

The manufacturing sector experienced a sharp decline, with GVA growth slowing to 2.2% from 14.3% in the same period last year. Mining and quarrying contracted by 0.01%, compared to 11.1% growth a year ago. Utilities also slowed, with electricity, gas, and water supply growing at 3.3%, down from 10.5% in Q2 FY24.

Services showed mixed results. Financial, real estate, and professional services grew by 6.7%, up from 6.2% last year, while hospitality, transport, and broadcasting services recorded 6% growth, an improvement from 4.5% a year ago.

Hopes for a Rebound

Economists remain optimistic about a stronger H2 FY25. Higher government expenditure, festival spending, and rural recovery are expected to drive growth.

However, projections for full-year GDP growth have been revised downward. Aditi Nayar, Chief Economist at ICRA, pointed to manufacturing and mining contractions and a slower services sector as key concerns. She projected FY25 growth below the RBI’s 7.2% estimate.

The NSO reported that nominal GDP in Q2 FY25 rose to ₹76.60 lakh crore, an 8% year-on-year increase. For the first half of FY25, real GDP grew by 6%, with nominal GDP rising by 8.9%.

Economists believe GDP growth will need to average 8.3% in H2 to align with RBI’s forecast.

Policy Implications and Market Reactions

Despite the slowdown, the Reserve Bank of India (RBI) is unlikely to lower policy rates due to persistent inflation and global uncertainties. Economists expect a cautious stance during the December MPC meeting, with potential rate cuts delayed until February.

Chief Economic Advisor Nageswaran emphasized addressing capital formation barriers, citing excessive rainfall and pre-election uncertainties as contributing factors to Q2’s slowdown.

He stressed the importance of increasing public investment and reducing revenue expenditure for sustained growth.

Manufacturing and Consumption Trends

Manufacturing continued to struggle, with growth slowing to 2.2% from 7% in the previous quarter. However, rural consumption showed signs of recovery, with increased real wages and two-wheeler sales.

FMCG companies also reported improved rural demand, signaling a potential boost to consumption-driven growth.

Economists noted uneven sectoral performances, with private consumption growth slowing to 6%, while government consumption expenditure grew by 4.4%.

Investments, represented by gross fixed capital formation, grew by 5.4%, down from 7.5% in Q1 FY25 and 11.6% a year ago.

Mixed Signals from Exports and Imports

Exports of goods and services grew by 2.8% in Q2, down from 8.7% in Q1. Services exports surged by 13.6%, while merchandise exports declined by 2.6%. Imports contracted by 2.9%, marking the end of a five-quarter growth streak.

Outlook for Key Sectors

Agriculture reported robust growth at 3.5%, while mining contracted by 0.1%. Construction grew by 7.7%, slower than earlier quarters. Utilities showed deceleration, growing at 3.3%, compared to 10.5% a year ago.

Despite the slowdown, sectors such as hospitality and transport showed resilience. Experts remain optimistic about improved growth in the coming quarters, driven by capital expenditure and rural demand recovery.