Do it yourself

 While the 7.4% GDP growth number for 4QFY25, and claims of continuing strong growth momentum in April 2025 are encouraging, the RBI assessment of FY26 growth and aggressive policy stance raise some doubts. A careful analysis of the GDP data released by the NSO also leaves some doubts about the consistency and sustainability of the 4QFY25 growth numbers.

Many economists have noted discrepancies and incongruencies in the data, as well as comparisons with other economic indicators and external analyses.

For example, I found the following noteworthy.

Discrepancy Between GDP and GVA Growth Rates

In Q4 FY25, GDP growth is 7.4%, while GVA growth is 6.8%. The divergence between GDP and GVA growth rates is notable, as GDP includes net taxes (taxes minus subsidies), which can distort the picture of underlying economic activity captured by GVA.

The gap suggests that tax revenues or subsidy adjustments may have inflated GDP growth relative to GVA. For instance, higher GST collections or reduced subsidies might have boosted GDP figures without reflecting proportional growth in actual economic output. This discrepancy raises questions about the sustainability of growth driven by fiscal adjustments rather than core sectoral performance.

As per Systematix research, “Recent robust GST collections have been interpreted as evidence of strong economic growth, supporting the 4QFY25 real GDP growth of 7.4%. However, this narrative contrasts with on-ground economic indicators suggesting a demand slowdown. Our analysis reveals that rising GST collections stem not from stronger economic growth but from increased indirect tax incidence in a slowing economy. This trend aligns with the government’s pro-cyclical fiscal tightening framework over recent years. We estimate an excess tax collection of INR 2.9 trillion over the past two years (2QFY24–1QFY26E), which has elevated the net indirect tax burden on Indian households to a historical peak. This has suppressed household spending power, exacerbating the lack of real income growth.”

Q2 FY25 Growth Slowdown vs. Q4 Recovery

2QFY25 reported a seven-quarter low GDP growth of 5.4%. 1QFY25 growth slowdown could be explained by the spending restrictions due to the imposition of the model code of conduct during the general elections (March-June 2025). Logically, 2QFY25 should have witnessed excessive government spending due to spillover effects from the previous quarter.

The rapid recovery from 5.4% in Q2 to 7.4% in Q4 appears inconsistent with the broader FY25 growth of 6.5%, suggesting uneven economic momentum. The low Q2 growth was attributed to reduced government spending and weak private investment, but the factors driving the Q4 rebound (e.g., manufacturing and construction) are not fully explained in the press release.

Sectoral Growth Inconsistencies

Agriculture (3.8% in FY25)

The agriculture sector’s growth improved significantly from 1.4% in FY24 to 3.8% in FY25, attributed to a good monsoon. However, this contrasts with reports of uneven monsoon distribution and challenges like low reservoir levels in some regions, which could have limited agricultural output in certain areas.

The uniform 3.8% growth figure may mask regional variations or overstate the sector’s recovery, especially since agricultural income growth (e.g., farm wages) has not kept pace, as noted in some external analyses.

Manufacturing (5.0% in FY25)

Manufacturing growth slowed sharply from 9.9% in FY24 to 5.0% in FY25, yet Q4 FY25 GDP growth (7.4%) suggests a manufacturing rebound. This is inconsistent with high-frequency indicators like the Index of Industrial Production (IIP), which showed subdued industrial activity in most parts of FY25.

The slowdown aligns with high input costs and weak export demand, but the Q4 recovery lacks detailed sectoral data to confirm whether manufacturing truly drove the uptick or if other factors (e.g., statistical adjustments) played a role.

Construction (9.4% in FY25)

Construction grew at 9.4%, down slightly from 10.4% in FY24, yet government capital expenditure reportedly slowed in FY25. This raises questions about the source of growth, as public infrastructure spending is a key driver of construction.

Private sector construction (e.g., real estate) may have contributed, but the press release does not disaggregate public vs. private contributions, creating ambiguity.

Expenditure-Side Discrepancies

Private Final Consumption Expenditure (PFCE) grew at 7.2% in FY25 (up from 5.6% in FY24), indicating strong household spending. However, this contrasts with external reports of weak rural demand and urban consumption slowdowns, particularly in discretionary goods (e.g., automobiles, FMCG).

The robust PFCE growth may be driven by urban or high-income consumption, but the lack of granular data obscures whether this reflects broad-based demand or is skewed by specific segments.

Government Final Consumption Expenditure (GFCE) growth slowed to 2.3% in FY25 from 8.1% in FY24, reflecting fiscal consolidation. However, the strong Q4 GDP growth (7.4%) and high growth in public administration (7.8%) suggest continued government spending in certain areas, creating a potential mismatch.

The low GFCE growth may understate government contributions in Q4, or the sectoral growth in public administration may reflect non-expenditure factors (e.g., statistical adjustments).

Gross Fixed Capital Formation (GFCF) growth slowed to 7.1% in FY25 from 8.8% in FY24, indicating weaker investment. This aligns with reports of sluggish private investment but contrasts with the strong construction sector growth (9.4%), which typically relies on capital investment.

The disconnect suggests that construction growth may be driven by specific sub-sectors (e.g., real estate) rather than broad investment, but the press release lacks clarity on this.

Mismatch with High-Frequency Indicators

The GDP growth of 6.5% for FY25 and 7.4% for Q4 FY25 appears optimistic compared to high-frequency indicators like-

Index of Industrial Production (IIP): Showed weaker industrial growth, particularly in manufacturing, contradicting the Q4 rebound.

Purchasing Managers’ Index (PMI): Indicated slower manufacturing and services activity in parts of FY25.

Core Sector Output: The eight core industries (e.g., coal, steel, cement) showed subdued growth in some quarters, inconsistent with the strong construction and manufacturing contributions in Q4.

These indicators suggest a more sluggish economy than the NSO’s GDP figures imply, raising concerns about potential overestimation or statistical discrepancies in the GDP calculations.

Comparison with External Forecasts

The NSO’s FY25 GDP growth estimate of 6.5% is lower than the Reserve Bank of India’s (RBI) revised forecast of 6.6% (down from 7.2%) but higher than some private forecasts (e.g., 6.0–6.3% by agencies like ICRA or SBI). The Q4 growth of 7.4% also exceeds many analysts’ expectations (e.g., 6.8% median estimate).

The higher-than-expected Q4 growth and the annual estimate suggest either a stronger-than-anticipated recovery or potential overestimation in the NSO’s provisional data. The reliance on provisional estimates, which are subject to revision, adds uncertainty.

Other disconnects

There are some other disconnects in the GDP data. For example, the nominal growth in 4QFY25 at 10.8%, much ahead of money supply growth of 9.6% is fully explained. A growing economy would usually need higher money supply due to higher transaction demand. This mismatch can probably be explained by the use of an erroneous deflator. Besides, external trade data, sharp contraction in subsidy payments etc. also raise some doubts.

Also read

The state of the Indian economy

The Indian economy – glass half full

The Indian economy – glass half empty

RBI makes a bold bet

The Indian economy has indubitably shown brilliant resilience and sustained the base growth rate of ~6%. In the current year FY26 also the real GDP is expected to grow in the range of 6.3% to 6.6% (vs 6.5% in FY25).

It is expected that the tax incentive offered in the budget for FY26 may support urban consumption demand, that has been lagging for the past couple of years, while the rural demand has shown some pick-up. Good monsoon may further stimulate rural demand. Benign inflation and below potential growth trajectory shall keep the RBI on the monetary easing path. Rates may fall further and liquidity may remain supportive. Continued focus on capacity building by the government may however continue to remain the mainstay of the growth.

The global environment remains challenging with trade related uncertainties and geopolitical tensions persisting. However, a resolution of trade and geopolitical conflicts could provide strong impetus.

In my view, 6% (+/- 50bps) may now be the base growth rate (or the new Hindu rate of growth, if you like) for the Indian economy. If India can manage to meet the basic needs (food, clothing, shelter, water, electricity, sanitation, basic education, and primary health) of its 1.4 billion population, our economy might keep growing at this rate for the next decade or so, at least. However, this base rate of growth may not be sufficient to lift the Indian economy to the middle income category like China, Brazil, South Korea, Malaysia, Indonesia, etc.

We urgently need catalysts that may provide the necessary escape velocity to catapult the India economy into a higher growth orbit. Unfortunately, the current growth paradigm lacks those catalysts.

To make my point clear, I would like to highlight the following three inadequacies of India's current growth paradigm.

Declining trend of global integration

The Indian economy has failed to maintain the pace of globalization. The share of India in global trade has remained marginal. In the past 11 years, our exports, as a percentage of GDP, have declined ~14% from 25.2% of GDP in FY14 to 21.6% of GDP in FY25. Similarly, imports have also declined from 27% of GDP in FY14 to 22.5% of GDP in FY25.

India’s exports have grown at a CAGR of 4.64% during FY15-FY25, while imports have grown at a CAGR of 4.36% during this period. The real GDP in this period has grown at a CAGR of 6.09%.

Even worse, the merchandise exports (mostly manufactured goods) have grown at a meager CAGR of 2.54% in the past 11 years. The share of merchandise export, as a percentage of GDP, has contracted 28.6% since FY14. Manufacturing GVA in FY25 was at all time low. Obviously, the government strategy of incentivizing manufacturing and boosting exports is not yielding good results, and may need a comprehensive overhaul.

 

Rate of investment remains low

The rate of investment in the Indian economy has shown some pick up in the post covid period, but it still remains much below the rate seen during 2004-2013 period. Gross Fixed Capital Formation (Investments) have grown at a CAGR of 6.41% (vs Real GDP CAGR of 6.09%) during FY15-FY25. Obviously, this rate of growth in investments is not adequate to gain escape velocity.

The corporate capex growth has also slowed down to just 8% in FY25, after two years of higher growth (27% in FY23 and 20% in FY24)

Consumption not growing

The share of private consumption in the GDP has remained stagnant around ~56 over the past 15 years (except during Covid years). In the past 11 years (FY15 to FY25) it has grown at a CAGR of 6.06%, less than the real GDP growth CAGR of 6.09%. Interestingly, in this period taxes on goods and services have increased at a CAGR of 6.41%.

Government consumption has also slowed down in this period from 10% of GDP in FY14 to 9.1% of GDP in FY25. Overall, government consumption has grown at a slower CAGR of 5.18% during FY15-FY25.

Notably, NSO second advance estimates of FY25 GDP has projected private consumption growth at 10% in 4QFY25 vs the actual 6%. For the full year private consumption growth of 7.2% was also marginally lower than the NSO forecast of 7.6%.

So, if none of the engines of growth – exports, consumption and investments – is showing signs of acceleration, achieving a higher target may not be possible; even though we may just draw comfort from the fact that base growth rate is now higher s compared to 1950-1990 period.

Next week – Growth statistics – the disconnect

Also read

The state of the Indian economy

The Indian economy – glass half full

The National Statistical Office (NSO) released provisional estimates (PE) of the annual growth statistics for the Indian economy, last Friday. The data indicates that the Indian economy grew at a rate of 7.4% (real GDP) in 4QFY25 and at a rate of 6.5% for the full year FY25.

The key highlights of the growth data could be listed as follows:

FY25 Growth

Real GDP: Estimated at ₹187.97 lakh crore at constant (2011-12) prices.

Growth rate: 6.5% compared to ₹176.51 lakh crore in FY 2023-24 (8.2% growth in FY24).

Nominal GDP: Estimated at ₹330.68 lakh crore.

Growth rate: 9.8% compared to ₹301.23 lakh crore in FY 2023-24.

Real Gross Value Added (GVA): Estimated at ₹171.87 lakh crore at constant prices.

Growth rate: 6.4% compared to 7.2% in FY 2023-24.

Nominal GVA: Growth rate: 9.5% compared to 8.5% in FY 2023-24.

Quarterly GDP Estimates for Q4 FY 2024-25 (January-March 2025)

Real GDP: Estimated at ₹51.35 lakh crore at constant prices.

Growth rate: 7.4% compared to ₹47.82 lakh crore in Q4 FY 2023-24.

Real GVA: Estimated at ₹45.76 lakh crore at constant prices.

Growth rate: 6.8% compared to Q4 FY 2023-24.

Observations

The 6.5% real GDP growth in FY25 is lower than the 8.2% recorded in FY24, reflecting a slowdown attributed to factors like reduced government capital expenditure and sluggish private investment.

The Q4 FY25 growth of 7.4% indicates a rebound from the 5.4% growth in Q2 FY25, driven by strong performances in manufacturing, construction, financial services, and agriculture, supported by a good monsoon and easing inflation.

The agriculture sector’s improved performance (3.8% growth) is a notable positive, while manufacturing and mining sectors saw slower growth compared to FY24.

The estimates are provisional and subject to revision as more data becomes available, with the next update (Second Advance Estimates and Q3 FY25 data) scheduled for February 28, 2025.

Sectoral trends

In FY25, most sectors experienced slower growth in FY25 compared to FY24, contributing to the overall real GVA growth of 6.4% (down from 7.2%). The slowdown is attributed to a high base effect from FY24, reduced government capital expenditure, high interest rates, and global economic challenges.

Agriculture’s recovery (3.8%) and construction’s robust growth (9.4%) were key positives, supported by favorable monsoons and infrastructure investments, respectively. Q4 FY25 showed a rebound (6.8% GVA growth), indicating improving economic momentum.

Manufacturing (5.0%) and mining (4.2%) remained the key areas of concerns, reflecting industrial and external demand weaknesses. Trade and hospitality also saw moderated growth due to cautious consumer behavior.

Agriculture, Livestock, Forestry, and Fishing

Growth Rate: 3.8% in FY25 (up from 1.4% in FY24).

Farm sector recorded a significant recovery compared to the previous year’s low growth. The improvement is primarily driven by favorable monsoon conditions, which boosted agricultural output. Enhanced livestock and fishery activities also contributed. The sector’s resilience is notable, as it supports rural economies and overall food security, despite challenges like fluctuating global commodity prices.

The growth trend also indicates better crop yields and government support through schemes like minimum support prices (MSP) and rural infrastructure investments.

Mining and Quarrying

Growth Rate: 4.2% in FY25 (down from 7.1% in FY24).

Mining sector experienced a notable slowdown, reflecting reduced demand for minerals and challenges in global commodity markets. Domestic factors like regulatory constraints and environmental clearances may have also impacted mining activities.

The decline suggests a moderation in industrial demand for raw materials, potentially linked to slower manufacturing growth and global economic uncertainties.

Manufacturing

Growth Rate: 5.0% in FY25 (down from 9.9% in FY24).

Manufacturing growth decelerated significantly, driven by weaker domestic and export demand, high input costs, and supply chain disruptions. The sector faced challenges from elevated interest rates and stricter lending norms, which constrained industrial expansion.

However, despite the slowdown, manufacturing showed some recovery in Q4 FY25, contributing to the overall GDP growth of 7.4% for that quarter. Government initiatives like "Make in India" and production-linked incentives (PLI) continue to support the sector, but external pressures limited growth.

Electricity, Gas, Water Supply, and Other Utility Services

Growth Rate: 7.5% in FY25 (down from 7.8% in FY24).

The utilities sector maintained relatively strong growth, though slightly lower than the previous year. Steady demand for electricity, driven by industrial and domestic consumption, and investments in renewable energy supported this performance. Water supply and utility services also contributed positively.

The marginal decline reflects stable but not exceptional growth, with ongoing infrastructure investments in clean energy and utilities providing a foundation for resilience.

Construction

Growth Rate: 9.4% in FY25 (down from 10.4% in FY24).

Construction remained a robust performer, driven by government-led infrastructure projects, urban development, and real estate demand. The slight slowdown from FY24 is attributed to reduced government capital expenditure compared to the previous year’s high base.

The sector’s strong growth underscores its role as a key driver of economic activity, supported by initiatives like the National Infrastructure Pipeline and housing schemes.

Trade, Hotels, Transport, Communication, and Broadcasting

Growth Rate: 6.1% in FY25 (down from 7.5% in FY24).

This sector saw a moderation in growth due to weaker performance in trade and hospitality, impacted by reduced consumer spending in certain segments and global trade slowdowns. Transport and communication services, however, benefited from digital infrastructure investments and logistics improvements.

The decline reflects challenges in discretionary spending, though digital services and logistics provided some cushion.

Financial, Real Estate, and Professional Services

Growth Rate: 7.3% in FY25 (down from 8.4% in FY24).

This part of the services sector maintained solid growth, driven by financial services (banking, insurance) and real estate, supported by urban demand and digital financial inclusion. Professional services, including IT and consulting, continued to perform well, though export-oriented IT services faced global headwinds.

The slight decline from 8.4% to 7.3% reflects global economic uncertainties affecting IT exports, but domestic financial services remained a strong contributor.

Public Administration, Defense, and Other Services

Growth Rate: 7.8% in FY25 (down from 7.9% in FY24).

This public services sector showed steady growth, driven by government spending on public administration, defense, and social services. The marginal decline reflects a normalization from FY24’s high growth, with fiscal constraints limiting expenditure growth.

The sector’s consistent performance (7.8%) highlights the prominent role of government spending in stabilizing economic growth, particularly in Q4 FY25.

More on Growth trends tomorrow.

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. 

It was summer of 2013. The mood on the street was gloomy. The stock markets had not given any return for almost three years. USDINR had crashed 28% (from 53 to 68) in a matter of four months. GDP was on course to drop to 5.5% after growing at a rate of over 8% CAGR for almost a decade. Current account deficit had worsened to more than 6% of nominal GDP (the worst in decades). The Fx reserves of the country were down to US$277bn, sufficient to meet just 5 months of net imports. The confidence in the incumbent government had completely depleted. The people were on the street protesting against ‘corruption’ and ‘policy paralysis’.

The global economy had still not recovered from the shock of the global financial crisis (GFC). The thought of unwinding of monetary and fiscal stimulus provided in the wake of being unwound was unnerving most emerging markets ((Taper Tantrums), including India.

India, which was touted as TINA (There is no alternative) by the global investors just five years back and had become a key member of BRIC and G-20; was already downgraded to “fragile five” by some global analysts. This was the time when the government of the day took some brave decisions. One of these decisions was to appoint Mr. Raghuram Rajan, former Chief Economist and Director of Research at the IMF and then Chief Economic Advisor to the Government of India, as the 23^rd governor of the Reserve Bank of India (RBI). Mr. Rajan with the full support of then Finance Minister, P. Chidambaram, took several effective damage control measures, and was able to pull the economy and markets out of crisis within a short period of one year. USDINR gained over 11%, stocks markets recorded their all-time high levels, CAD improved to less than 1% of nominal GDP, real GDP growth recovered to ~7% (FY15).

The situation today is nowhere close to the summer of 2013. Nonetheless, the feeling is that we could potentially head to a similar situation in the summer of 2025.

Worsening external situation - rising global trade uncertainties due to the US unpredictable tariff policies, depleting Fx reserves, weakening USDINR, declining FDI and persistent FPI selling, pressure on the government to cut tariff protection for the domestic industry, and rising probability of a global slowdown.

Slowing domestic growth - Prospects of a poor Rabi crop aiding pressuring food inflation and RBI policy stance, crawling manufacturing growth, limited scope for any meaningful monetary or fiscal stimulus, etc are some of the factors that suggest the probability of any meaningful growth acceleration in the near term is unlikely.

Uninspiring policy response – The policy response to the economic slowdown and worsening of external situation is completely uninspiring so far. The measures taken by the government and RBI appear insufficient and suffer from adhocism.

For example, RBI has announced several liquidity enhancement measures in the past three months. These measures have been mostly neutralized by USD selling by RBI to protect USDINR and rise in the government balance with RBI (inability of the government to disburse money quickly to the states or spend otherwise. Risk weight cut for lending to NBFCs and MFI etc. is too little and too late. The damage to credit demand and asset quality in the unsecured segment is already done, and is not easily reversible.

The fiscal stimulus (tax cut on for individual taxpayers) could support the economy if at all, from 2H2025 only. There is a risk that the taxpayers in lower income segments (Rs 7 to 15 lacs) might use the tax savings to deleverage their balance sheets by repaying some of their high-cost personal loans etc. In that case this stimulus could have a negative multiplier on growth.

The short point is that (a) we are yet not in a crisis situation; (b) if not handled effectively and with a sense of urgency, the current situation may not take long to turn into a crisis.

The government, especially the finance minister and RBI, would need to urgently take several steps to take control of the situation and inspire confidence in the businesses and investors. Leaving it to the external developments, e.g., USD weakening due to falling bond yields in the US; energy prices easing due to Russia-Ukraine truce; trade normalcy restoration due to Sino-US trade agreement and normalization of Red Sea traffic; a plentiful monsoon easing domestic inflation; etc. may not be a great strategy - even if it works this time.

As they say – “it is great to have faith in God, but always lock your car”.

The general reaction to the Union Budget for fiscal year 2025-26 is mostly positive. Most people have appreciated the commitment to fiscal discipline. Substantial increase in the allocation for rural and urban development programs has apparently come at the expense of lower or no growth in the allocation for food, fuel & fertilizer subsidies, defense and transportation (road and railways).

The most celebrated aspect of the budget is the enhancement of tax rebate under section 87A from Rs25,000 to Rs60,000; and restructuring of tax slabs from the earlier three to six in the new scheme of personal income tax. These changes would result in a potential net tax saving of 2-6% of the post-tax income.

The most debated aspect of the budget is the allocation to the capital expenditure. Analysts are calculating the total allocation for capex using different matrices and thus debating in favor or against the budget.

The budget numbers assume a nominal GDP growth of 10.1% for FY26, which will roughly translate into a 6.5% real GDP growth. The Revenue Secretary, in an interview to the Economics Times, termed this as the trend growth (see here). He emphasized that “more structural measures” are needed to push this trend growth higher to 7%.

I find this the most concerning aspect of the present governance and market narrative. We seem to be totally disregarding the fact that 6.5%-7% real growth is merely sufficient to maintain the current trends in the development of social and physical infrastructure. To achieve the ambition of developed India (Viksit Bharat) all curves affecting the quality of life need to shift much higher. As highlighted by the latest Economic Survey, we would need a sustained 8%+ growth for a couple of decades to become a middle-income country (Viksit Bharat).

This budget or any other recent policy announcement of the government does not show any glide path in that direction. To this extent, the governance and market narrative suffer from an extreme degree of adhocism, opportunism and complacency. A total absence of discussions on structural reforms needed to catapult the economy to 8-10% growth orbit in the popular discourse is a worrisome sign. Being content with a few administrative changes and procedural efficiencies (mostly due to adoption of available technology) as “reforms” might not help much.

I would like to explain this situation with the help of four short stories, which I have narrated before also.

Freedom from bondage: There was this feudal lord, who had enslaved a number of peasants on different pretexts. He would make them toil hard the whole day and give two inadequate meals to survive. Occasionally, on festivals, birthdays of his children, his marriage anniversary, and death anniversary of his parents, he would treat them with a good meal and sweets. Once in 3-4yrs, during winters, he would give them new blankets so that they do not die of cold. In return, the bonded peasants were expected to hail him as protector and great benefactor of the poor. No one ever dares ask for freedom from bondage.

Eat ladoo and hail the minister: Once the home minister of a state visited the Jail on Independence Day. After finishing his speech, he distributed some sweets (Ladoo) and asked the inmates about their problems and what he could do for them. Most complained about mosquitoes and the quality of food. Few wanted new blankets. Some daring one asked for a large screen TV in the library. No convict asked for freedom. The minister granted their wishes and won their adulation.

Save me an extra half kilometer drive: A minister on his election campaign addressed a gathering of a housing society’s members in a posh Bengaluru location. The only request these educated upper middle-class people made to this politician was to “provide a right turn in front of the society gate, as they have to go 500 mtrs ahead to take a U turn” for travelling in the right direction; disregarding the fact that providing this “right turn” would be “wrong” as it would cause huge traffic disruptions and frequent traffic snarls in front of the society gate. No one asked him to give an undertaking that he would not encourage corruption, if elected.

Art of staying relevant: In the late 1980s, I had an opportunity to attend a budget committee meeting of a large medical college cum hospital. The twelve-member committee comprised two doctors, three administrative in-charge, district magistrate (ex-office), local MLA (govt nominee), and five prominent local citizens. The total annual budget of the college was close to Rs230 crores. The committee cleared 73 expenditure proposals worth Rs180 cores in less than one hour. The 74^th item of agenda was a bicycle-shed for Class-IV employees of the college/hospital. The budget sought for this item was mere Rs3.5 lacs. This would have helped over 200 employees coming to work on bicycle, as the scorching heat often resulted in deflation of bicycle tyres. The committee discussed the matter for more than two hours and rejected the proposal. Later, the dean of the college explained that this was the only item on agenda, besides salaries, which all committee members understood fully. They used all their wisdom in discussing this item and saved Rs3.5 lacs for the college, thus justifying their relevance to the college and society! 

The market action in the past three days has been quite exciting. It reminded me of the market action witnessed during March-April 2020, in the wake of the outbreak of Covid-19 pandemic. Drawing from the experience of 2020, like many, at first, I was also tempted to increase my risk exposure to Indian equities. However, on second thought, I have decided to reign my temptation and avoid any deviation from the “plan”.

I note that the 2025-2026 market trajectory may not be similar to 2020-2021, for some very simple reasons.

·         Ignoring the panic fall in February-March 2020 and subsequent recovery, Nifty 50 gained 12% in 2020 and another 16% in 2021. These gains occurred because corporate earnings were coming out of a 10yr growth drought. Nifty EPS has grown over 225% in the past five years (FY21-FY25), against just 50% growth witnessed in the preceding decade (FY11-FY20). The growth trajectory is now moderating and is more likely to stabilize in 11-13% CAGR range in the next couple of years.

·         Presently, Nifty 50 forward consensus PE is marginally higher than the long term (10yr) average. With earnings growth moderating, there is no reason for the PE to re-rate to the higher levels. If at all, it can slightly de-rate to the long-term average. This implies that Nifty 50 returns are most likely to be in tandem with the earnings growth (11-13%), in the next couple of years, with some downside risk.

·         2024 has witnessed a record Rs5.26 trillion domestic flows into the local secondary market alone. Accounting for flows into primary markets, unlisted securities and foreign equities, domestic flows would be much higher. Expecting this kind of flow to sustain during 2025-2026 also, would be unreasonable. Given the currency weakness, higher cost of capital (bond yields) and rising uncertainties, foreign flows may not see a significant reversal from the 2024 trend, where foreign investors were marginal sellers (adjusted for buying in primary market).

·         The economic growth in 1HFY25 has been much below the expectations. No major recovery is expected in 2HFY25 and 1HFY26. The actual government capex for FY25 is expected to be much lower than the budget estimates. There are reports which suggest that the capex budget for FY26BE may not see any material growth. This trend raises reasonable doubts over the sustainability of the higher than historical valuations of the sectors and companies that were expected to benefit from higher government capex. For example, infra builders, PSEs, railway equipment suppliers, etc.

·         Financial sector, especially public sector banks, have contributed materially to the market buoyancy in the past four years. The rally in these banks was led by recapitalization, NPA resolution/recovery (asset quality improvement), margin expansion and high credit growth. None of these factors may be contributing in the next two years. Asset quality and margins have mostly peaked, and credit growth is moderating.

·         Last but not the last, one of the keenly watched indicators - the Market cap to GDP ratio – is at an all time high. With nominal growth trajectory settling at single digit level, and IPO activity remaining strong, the risk of market cap of the existing listed stocks correcting cannot be ignored.

The Reserve Bank of India (RBI) recently released the results of its latest forward-looking surveys (November 2024 Round). Based on the feedback received from the respondents the survey results provide important insights with respect to consumer confidence, inflationary expectations and economic growth expectations.

Consumer confidence – Present tense, hopes high for future

The survey collects current perceptions (vis-à-vis a year ago) and one year ahead expectations of households on general economic situation, employment scenario, overall price situation, own income and spending across 19 major cities.

As per the survey results, Consumer confidence for the current period declined marginally owing to weaker sentiments across the survey parameters except household spending. The current situation index (CSI) moderated to 94 in November 2024 from 94.7 two months ago. (A value below 100 indicates a state of pessimism)

However, for the year ahead, consumer confidence remained elevated, improving 50bps from the previous round of Surveys. Households displayed somewhat higher optimism on one year ahead outlook for major economic parameters, except prices. The future expectations index (FEI) stood at 121.9 in November 2024 (121.4 in the previous survey round).

The respondents’ sentiments towards current earning moderated marginally, they displayed high optimism on future income which was consistent with their surmise on employment conditions. Households anticipated higher spending over one year horizon on the back of higher essential as well as non-essential spending.

Household inflationary expectations rise

Households’ perception of current inflation rose by 30bps to 8.4%t, as compared to the previous survey round. Inflation expectation for three months horizon moderated marginally by 10 bps to 9.1 per cent, whereas it inched up by 10 bps to 10.1 per cent for one year ahead period.

Compared to the September 2024 round of the survey, a somewhat larger share of respondents expects the year ahead price and inflation to increase, mainly due to higher pressures from food items and housing related expenses. One year ahead, the price expectation of households is closely aligned with food prices and housing related expenses.

Male respondents expected relatively higher inflation in one to three months, as well as one year ahead, as compared to the female respondents.

GDP: Real gross domestic product (GDP) is expected to grow by 6.8% in 2024-25 and 6.6% in 2025-26. Forecasters have assigned the highest probability to real GDP growth in the range 6.5-6.9% for both the years 2024-25 and 2025-26.

Annual growth in real private final consumption expenditure (PFCE) and real gross fixed capital formation (GFCF) for 2024-25 are expected at 6.2% and 7.9% (revised down), respectively. Real gross value added (GVA) growth projection has been revised down marginally to 6.7% for 2024-25 and kept unchanged at 6.4 per cent for 2025-26.

 Inflation: Annual headline inflation, based on consumer price index (CPI), is expected to be higher at 4.8% for FY25 and 4.3% for FY26.

External sector: Merchandise exports and imports are projected to grow at a slower rate of 2.4% and 4.6% respectively in FY25 and recover to 5.5% and 6% respectively in FY26, in US dollar terms. Current account deficit (CAD) is expected at 1.0% (of nominal GDP) during both FY25 and FY26.

India’s real GDP grew by 5.4% yoy during 2QFY25 (July-Sep); the slowest growth rate recorded since 3QFY23. The Reserve Bank of India had forecasted a growth of 7%, just a month ago, while the market consensus was less sanguine at ~6.5%.

For the argument’s sake, some of the slowdown in 2QFY25 could be attributed to a high base (2QFY24 GDP grew at 8.1%). However, it is tough to deny that the Indian economy has been growing below potential in most of the post global financial crisis (GFC-2009) period. In fact, it will not be totally perverse to argue that in the past one decade or so, the potential growth curve itself has moved lower.

For record, the Indian economy has grown at an average rate of 5.8% during the past decade (FY15-FY24). Even normalizing for the Covid-19 lockdown impact, the Indian economy has grown at an average rate of 6.0%, much below the estimated potential growth rate of over 8%. The real GDP had grown at an average rate of 7.8% during the preceding decade (FY05-FY14).

The slowdown in 2QFY25 has been led by the industrial sector, especially, manufacturing and core sector (e.g., mining and electricity) – a sector that has been the highest priority area for the incumbent government in the past decade. Agriculture (3.5% growth) sector did well on the back of a bountiful monsoon; and services also grew at a decent 7.1% led by public administration. On demand side, investments contracted for the fourth consecutive quarter, belying the promise of a massive jump in allocation for capex in the union budgets for FY24 and FY25. Private consumption grew 6% yoy on a low base of 2.6%, but declined qoq, despite the higher DBT.

The fiscal data for April-October 2024 period shows that contrary to its commitment in the union budget, the government has sacrificed capital expenditure in favor of direct cash transfer (DBT) to households. Ahead of key state elections, the government transferred an advance installment of tax devolution to states to meet revenue expense obligations. The central government capex (including on defense) was much lower than the budget targets. The disbursement of the promised capex loans to the states was also lower. Revenue expenditure on education, drinking water and sanitation were restrained to increase DBT allocation.

The popular narrative after the announcement of 2QFY25 GDP data appears to be that high effective rate of taxes and higher interest rates are hurting the growth and fiscal and monetary stimulus may lead to a course correction. I sincerely beg to differ from this hypothesis.

I have often highlighted that the obstacles to the acceleration in India’s growth rate are structural and not cyclical. Inability to adequately exploit our most valuable resources – the human capital and the largest pool of arable land in the world – is the principal reason for below potential growth. Consistent misallocation of capital, adhocism in policy making, lack of a conceptual growth framework, a distorted federal political structure, blatant pursuit of crony socialism, and lack of a long-term socio-economic growth plan.

In this context, it might be pertinent to note the OECD has projected a gradual deceleration in the potential growth rate of the Indian economy in the next four decades, as the marginal productivity of capital declines and contribution from technological progresses diminishes. (Table 1). The potential rate declines, even if in a blue-sky scenario, where India is able to take fuller advantage of its demography and is able to achieve a much higher rate of capital accumulation and employment (Table 2). (see full report here)