Do it yourself

As per the latest national accounts data released last week, the economic growth of India appears to be normalizing in 6.5% +/- 0.3% band. Optically, this growth rate may appear decent; but is insufficient for achieving the target of catapulting the Indian economy into a higher orbit and sustaining the status of a middle-income economy.

After recording a higher growth rate of 8.8% CAGR for three years (FY22 to FY24) on a low base of Covid affected FY20 and FY21, the FY25 growth is estimated to be 6.5%. The consensus estimates for FY26e growth are also hovering around 6.5%.

From the internals of the economic data, it appears that growth trajectory of the Indian economy is settling in the current band, just like we spent decades in the 3-4% growth band in the pre-reform (1990s) era. Any effort to accelerate the economic growth would require transformative socio-economic reforms in the next five years.

Some critical points that need to be watched closely from the perspective of growth sustainability and acceleration could be listed as follows:

·         The share of primary sector that employs the largest share of workers has deteriorated from 22.1% in FY21 to 19.8% in FY25AE. The share of the secondary sector has also declined from 25.6% in FY21 to 25.2% in FY25AE. Especially, the share of manufacturing in the GDP is low at 14%, and has not recorded any material improvement despite the material incentives like PLI, etc. FY25AE growth of manufacturing is estimated to a dismal 3.5%.

·         The gross savings rate of the economy has fallen to 30.2% of GDP in FY25AE, materially lower than 33.8 in FY12, when the new GDP series started. The investment rate has also fallen in this period from 39% in FY12 to 31.4% in FY25AE. The household & corporate savings and investments have seen decline in FY25E. The government investment and consumption has been supporting the investment rate to stay above 30% of GDP. The fiscal constraints are indicating that this support may weaken in the coming years.

·         Early reports are indicating that Rabi crop in many states has been materially damaged by unusually dry and warm winters. Sugar production for SS25 is expected to be ~14% lower; while wheat crop may be 25-35% lower. Oilseed and pulse crops have also suffered damage. This data will reflect in 4QFY25 and 1QFY26 agriculture GVA and private consumption numbers.

It is important to note that MFI sector is already burdened by a material deterioration in the asset quality. Poor Rabi crop may add to the rural stress and adversely impact the overall consumption demand, given that urban demand is not showing signs of improvement.

It is therefore very much possible that the actual FY25E growth comes lower than the second advance (AE) estimates.

·         The global trade uncertainties are rising with the passage of every hour. A situation of material trade logjam, supply chain disruption, accelerated tariff war and/or high volatility in currency markets is not completely improbable. If any such situation does materialize, it may materially hurt the growth prospects and external vulnerability of India.