India’s economy rebounded in the third quarter of FY25, growing at 6.2 percent after slipping to a seven-quarter low of 5.6 percent in the previous quarter, according to data released on February 28. While the latest number fell slightly short of market expectations, it helped retain the full-year growth projection at 6.5 percent, based on the second advance estimates.
However, revised data for previous years suggest that the slowdown in FY25 is steeper than initially estimated. The government has revised GDP growth for FY24 upward to 9.2 percent from 8.2 percent, and for FY23 to 7.6 percent from 7 percent. These revisions indicate that the economic deceleration in the current year is sharper than previously projected, raising questions about the sustainability of growth momentum.
The third quarter recovery was largely driven by strong performances in the agriculture and services sectors, while manufacturing and construction continued to lag. Agriculture posted a robust growth of 5.6 percent, the highest in six quarters, compared to 4.1 percent in the previous quarter. A strong rabi harvest is expected to further support rural demand. The services sector also saw an improvement, expanding at 7.4 percent, marginally higher than the 7.2 percent recorded in the second quarter, driven by strong trade, transport, and financial services activity.
Manufacturing, despite improving to 3.5 percent from 2.1 percent in the previous quarter, remained sluggish, reflecting weak corporate profitability and stress in urban consumption due to inflation. Construction growth moderated to 7 percent from 8.7 percent, largely due to a slowdown in government infrastructure spending. Mining and electricity also recorded weaker growth, reflecting subdued industrial activity.
On the expenditure side, both private and government consumption saw an uptick, but investment growth remained a key concern. Private consumption rose by 6.8 percent in FY25, up from 5.3 percent in the previous year, signaling a gradual recovery in household spending. Government spending also picked up, though delays in capital expenditure rollout affected overall investment sentiment. The government has utilized 74.4 percent of its revised capital expenditure target of ₹10.2 lakh crore as of January, but its impact on broader investment has been limited.
Investment growth, as measured by gross fixed capital formation (GFCF), slowed to 6 percent in FY25 from 9.8 percent in FY24. The investment rate, or the share of capital formation in GDP, fell to 29.5 percent, its lowest level in four years, reflecting weaker public investment in the first half of the fiscal year and the lack of broad-based private investment.
Looking ahead, the economy is expected to maintain a similar pace of growth in the next fiscal year. A poll of 18 economists pegs GDP growth at 6.6 percent for FY26. However, sustaining momentum amid global uncertainties and domestic investment constraints will be a challenge. Fiscal and monetary policy measures, including potential tax rationalization and interest rate cuts, could provide some relief.
Madan Sabnavis, Chief Economist at Bank of Baroda, noted that while revisions to past data make forecasting difficult, the broader economic picture remains unchanged. Agriculture and services will continue to drive growth, but manufacturing remains a weak spot. For India to achieve the projected 6.5 percent growth for FY25, the economy will need to grow at around 7.4-7.6 percent in the fourth quarter, a challenging but not impossible target. The next few months will be crucial in determining whether the recovery remains on track, particularly in the areas of industrial growth and capital investment.