GDP shocker | Paucity of investments behind sharp fall in FY25 numbers

The current fiscal year has witnessed increased spending by rural households while urban households, on the other hand, have cut down their spending on non-food items and big-ticket items like automobiles and consumer durables.

India’s middle class and its consumption habits have a significant impact on economic growth, as private final consumption expenditure (PFCE) has accounted for nearly 60 per cent of GDP since at least FY20.

PFCE refers to the total spending by households and non-profit institutions on food, clothes, automobiles, consumer durables, fast moving consumer goods (FMCG) products, health, education, and leisure activities.

Also read: India's GDP growth projected to slow down at 6.4%, lowest in four years

Lion’s share of GDP

In the current fiscal year, this spending by India’s teeming middle class has been under focus, as urban households have been withholding non-food expenditure on soap, cooking oil, shampoo, and biscuits while also curbing their propensity to buy new cars and household electronics.

But rural households, buoyed by a robust kharif crop and good monsoons, have loosened their purse strings during the first six months of the fiscal and are expected to keep up this trend through the remaining six months.

In short, India’s hinterland is accounting for a lion’s share of its GDP growth, as its urban areas struggle.

MoSPI estimates

In this background, the latest advance estimates of India’s economic health released by the government come as no surprise.

Per the First Advance Estimate of the Ministry of Statistics and Program Implementation (MoSPI), India's GDP growth for FY25 is expected to be 6.4 per cent, significantly below the 8.2 per cent growth recorded last fiscal.

This growth estimate is not only lower than what the Reserve Bank of India projected (6.6 per cent), it is also the slowest growth since 2021-22, the COVID pandemic year. GDP growth was at 9.7 per cent, 7 per cent and 8.2 per cent respectively in FY22, FY23, and FY24.

Also Read: India's GDP growth to remain steady at 6.5% in FY25, FY26: EY report

Consumption demand

“The most important monitorable would be a more broad-based pick up in consumption demand, especially amid reports of slowing urban consumption,” said CARE Ratings’ Chief Economist Rajani Sinha and her colleagues in a note.

The CARE Ratings analysis showed that private consumption growth was 6.8 per cent in H1 (first six months of the fiscal year) but was expected to accelerate to 7.8 per cent in the second half.

But this increase is likely being driven solely by rural consumers, since urban demand continues to suffer.

Growth is expected to pick up in the second half of the year, with agriculture, manufacturing sector, and public administrative and defence services witnessing higher growth compared to the first half. On the expenditure side, an uptick in government expenditure and private consumption would support the growth momentum in H2.

“For FY26, we expect real GDP growth at 6.7 per cent,” the CARE Ratings economists said.

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Volume pressure on FMCG companies

Meanwhile, brokerages have already warned that volume pressure may have hurt margins and profitability at FMCG companies in the December quarter, results for which are expected to trickle in soon.

This is a direct consequence of slowing urban consumption of biscuits and cooking oil, soap and shampoo. Many FMCG majors have already resorted to price increases, too.

Take Dabur India, for instance. In a stock exchange filing for the December quarter, the company said that rural consumption for FMCG was resilient in Q3 and continued to grow faster than urban and that the company expected “flattish” operating profit for the quarter. It also undertook price increases for products where commodity prices increased during the quarter.

Automobiles sales

Then, per data from the government’s Vahan vehicle registration portal, retail sales of automobiles in December indicated a mixed year-on-year growth trend as tractors recorded sharp double-digit growth but cars showed a flattish trend, while two wheelers declined by a sharp 21 per cent YoY.

For the full calendar year of 2024, overall vehicle retail sales were up 9 per cent but passenger vehicles grew by just 5 per cent and this growth too came on deep discounts across vehicle categories. Also, commercial vehicle sales remained nearly flat.

The two categories which saw robust double-digit growth were two and three-wheelers — both have a marked rural bias.

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‘Paucity of investments’

Madhavi Arora, Chief Economist, Emkay Global Financial Services, said the first estimate of FY25 GDP growth at 6.4 per cent implied that the second half of the current fiscal year “will see steady growth at around 6.8 per cent after the tepid growth of 6 per cent in H1".

"However, we think 2HFY25 may face downward pressure, implying a downside risk to FY25AE of 6.4 per cent, amid weaker participation of private economic agents," said Arora.

She was referring to the paucity of investment by both government and the private sector in the current fiscal year so far. This is already being flagged by economists as one of the key concerns.

The government’s investment growth is expected to remain at about 6.4 per cent in the second half of the fiscal year, much on the lines of H1, belying expectations of a pick-up after the drags of general elections earlier.

Even the private sector has been reluctant to step up investments, despite the generous corporate tax rate cut by the government during the pandemic years.