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Informist, Friday, May 30, 2025

 

By Shubham Rana

 

NEW DELHI – India's GDP grew 7.4% in Jan-Mar, the fastest expansion in four quarters, and sharply higher than expectations. Beyond headline, however, latest data shows that Indian economy remains a mixed bag amid an increasingly uncertain global growth outlook, needing support from the monetary policy.

 

At 7.4%, GDP growth was 20 basis points higher than the most optimistic of estimates in an Informist poll. For 2024-25 (Apr-Mar), GDP grew 6.5%, the lowest growth in the post-COVID era. Growth in Jan-Mar was supported by the government's capital expenditure and pick-up in construction activity, but also by a statistical effect of higher net taxes.

 

Net taxes, the difference between indirect taxes and subsidies, rose 12.7% on year in Jan-Mar. As GDP is calculated by adding net taxes to gross value added, GDP growth was much higher than the gross value added growth. The gross value added--which economists consider a more reliable indicator of economic activity--grew 6.8% in Jan-Mar, the highest in four quarters, but 60 basis points lower than GDP growth.

 

Statistical effects aside, several areas of economy showed uneven growth. Private consumption growth fell to a five-quarter low of 6.0%, likely pulled down by lagging urban demand.

 

"Rural demand is expected to be supported by favourable agricultural output and easing inflation, while the outlook for urban demand remains mixed," CareEdge Ratings Chief Economist Rajani Sinha said in a note. "Anecdotal evidence points to subdued wage growth, contributing to muted urban consumption."

 

Farm sector growth moderated to 5.4% in Jan-Mar from 6.6% in the previous quarter, while manufacturing growth remained subdued at 4.8% and mining at 2.5%.

 

TARIFF-CLOUDED OUTLOOK

"Looking ahead, it's difficult to envisage a further pick-up in growth from the rate of Q1 (Jan-Mar), and there are headwinds," said Shilan Shah, deputy chief emerging markets economist at Capital Economics, in a note. "Fiscal policy is going to remain fairly tight."

 

However, Shah said, the economy is likely to perform well over the coming quarters. "Monetary policy is going to become more supportive. And while this week has led to even more uncertainty around the future of US trade policy, our view is that tariffs on China are going to remain high," Shah noted.

 

Economists and multilateral agencies in recent months have lowered India's growth forecast for FY26 to near 6%, citing trade-related global uncertainty, driven by the imposition of reciprocal tariffs by the US. The US in April imposed tariffs on its trading partners but quickly put them on hold till Jul. 9. Imports from India into the US could face a 26% tariff from July, even as the two nations are working on a trade agreement.

 

The International Monetary Fund in April slashed its India's GDP growth forecast for FY26 by 30 bps to 6.2%, while the World Bank lowered it by 40 basis points to 6.3%. Even the Reserve Bank of India lowered its growth forecast to 6.5% from 6.7% previously expected.

 

The government, however, remains optimistic about the country's growth prospects. On Tuesday, the finance ministry said that GDP growth may be close to 6.8% in FY26 on the back of income tax exemptions in the Budget, along with interest rate cuts by the RBI.

 

The RBI's Monetary Policy Committee has lowered interest rates by 50 basis points since February to 6.00%, and is expected to cut the repo rate by another 25 bps next week. The central bank has also provided ample liquidity to the banking system, in a bid to fast-track the impact of lower interest rates.

 

"The high frequency data in the last few months continues to point towards a patchy recovery, with the sequential momentum suggesting moderation compared to the previous quarter," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank. "We expect the benign inflation and soft growth to continue to provide the MPC (Monetary Policy Committee) room for incremental monetary easing, with 25 bps cut in the upcoming June policy."

 

Chief Economic Adviser to the Government V. Anantha Nageswaran Friday said that the pick-up in economic momentum is keeping up pace in the current fiscal year as well. Government's capital expenditure rose 61% on year in April, while other indicators such as Purchasing Managers' Index also show a rise in economic activity.

 

According to Madhavi Arora, chief economist at Emkay Global Financial Services, FY26 will be marred by global uncertainties weighing on corporate investment intentions and exports growth, while easing urban incomes will weigh on private consumption. "While countercyclical monetary policy may offer some relief, the space for conventional fiscal support appears limited," Arora said.

 

In such an environment, the RBI and the MPC may have to take up additional responsibility to support growth with more interest rate cuts. Another 50 bps of rate cuts are widely expected, but as things stand, the central bank may have to offer double that relief.  End

 

Edited by Akul Nishant Akhoury

 

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