India’s growth slowed to 5.4% in Q2 FY25, primarily due to weak capital formation and geopolitical-driven export challenges. However, rural consumption remained resilient, and the services and agriculture sectors outperformed despite industrial slowdown.
Infrastructure Spending:
The government increased infrastructure allocations significantly, with capital expenditures rising by 28.4% in FY24 and projected to grow by 17% in FY25. However, H1 FY25 capital spending reached only 37.3% of the annual target, trailing last year’s 49% benchmark.
Strong Credit Growth:
Improved bank balance sheets and declining NPAs have spurred lending. Credit to MSMEs grew notably in Q2 FY25, with micro and small enterprises up by 13.4% and medium enterprises by 20.5%, signaling increased investment and expansion in the sector.
Services Sector Resurgence:
Services grew robustly at 7.6% in FY24, with continued momentum (7.1% in H1 FY25). Services exports surged by 21.3% YoY between April-October 2024, driven by IT and business services. Finance, insurance, real estate, and business services expanded by 9.2%, boosting urban middle-class spending.
Downside Risks
Inflationary Pressures:
Volatile retail inflation driven by food price spikes has exceeded the RBI’s 4% target for most of the year. In October 2024, CPI inflation breached the upper tolerance limit, hitting 6.21%, mainly due to soaring vegetable prices and persistent food inflation.
Geopolitical uncertainties: Geopolitical concerns continue to influence global investors and policymakers. The intensification of the Israel-Iran conflict in October caused a temporary spike in oil prices and disrupted global supply chains. Emerging markets, including India, experienced capital outflows, particularly after China’s stimulus announcements on September 25. This resulted in a sharp decline in net Foreign Institutional Investor (FII) investments, reaching levels comparable to the onset of COVID-19.Looking ahead, the outcome of the US elections could introduce shifts in trade and investment relations with Western nations, further impacting global supply chains. Additionally, volatile oil prices and the potential for higher trade tariffs pose risks to India’s export growth and current account balance.
