India's Economic Outlook Expected to Grow 6.6% in Q3 FY2025 Amid Challenges: ICRA Report ICRA estimates the GVA growth to improve to 6.6 per cent in Q3 FY2025 from 5.6 per cent seen in Q2 FY2025; the pace of GDP growth in the quarter will be contingent on the Government's subsidy pay-out and indirect tax inflows. Overall, we expect the GVA and GDP growth to print at 6.5 per cent each in FY2025
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India's economic narrative is turning a new page, with projections indicating an uptick in year-on-year (YoY) GDP growth to 6.6 per cent in Q3 FY2025, compared to 5.6 per cent in Q2. This rebound is anchored by a combination of improving industrial activity and festive season-driven manufacturing gains, among others. While challenges remain, the trajectory suggests cautious optimism as the fiscal year progresses.
As per a report by ICRA titled Indian economy, the festive season in Q3 FY2025 played a pivotal role in revitalizing manufacturing output. The industrial sector's YoY growth is expected to improve, aided by the dissipation of monsoon-related disruptions that previously dampened mining and electricity demand. The narrowing deflation in global commodity prices may slightly pressurize corporate margins, but the seasonal uptick in demand is expected to drive volume growth.
The consumer price index (CPI) inflation is expected to average at 4.8 per cent for FY2025, aligning with the Reserve Bank of India's (RBI) target. The possibility of a rate cut in February 2025 hinges on whether December inflation eases to approximately five per cent or lower.
The current account deficit (CAD) presents a growing concern as well. India's merchandise exports faced a setback in November 2024, falling to a 25-month low of $32.1 billion due to a 49.7 per cent drop in oil exports. Meanwhile, imports surged to a record high of $70 billion, fueled by a 331.4 per cent jump in gold imports driven by festive and marriage-related demand. The monthly trade deficit widened to $32.5 billion in October-November 2024, up from $24.7 billion in Q2 FY2025. This significant deficit could weigh on Q3 GDP growth.
Navigating challenges
Geopolitical tensions and tariff-related uncertainties could disrupt commodity prices and external demand. Additionally, the widening trade deficit and potential constraints in achieving the government's capex targets could temper growth expectations.
Moreover, the narrowing deflation in global commodity prices, reflected in the Bloomberg Commodity Index (BCOM), suggests that industrial margins may face pressure. The deflation rate eased to 3.1 per cent YoY in Q3 FY2025 from 7.8 per cent in Q2, signaling rising input costs that could weigh on profitability.
What lies ahead?
Looking beyond Q3, GDP growth is projected to inch higher in Q4 FY2025, supported by buoyant rural demand and an anticipated pick-up in government capital spending. However, the overall GDP and GVA growth for FY2025 are estimated at 6.5 per cent each, down from 7.2 per cent and 8.2 per cent respectively in FY2024.
The fiscal deficit, currently trailing the FY2025 target of 4.9 per cent of GDP, remains a focal point. While the government's first supplementary demand for grants (amounting to INR 441.4 billion) in December 2024 hints at prudent fiscal management, any deviation from targets could influence long-term growth prospects.
"ICRA estimates the GVA growth to improve to 6.6 per cent in Q3 FY2025 from 5.6 per cent seen in Q2 FY2025; the pace of GDP growth in the quarter will be contingent on the Government's subsidy pay-out and indirect tax inflows. Overall, we expect the GVA and GDP growth to print at 6.5 per cent each in FY2025," the report stated.
