What caused subpar Indian GDP growth recently

The lower-than-expected real GDP growth rate of 5.4% for Q2FY25 can largely be attributed to subdued government expenditure, particularly on capital investments, and weak manufacturing activity. Another significant factor that further dragged down the figure was the GDP deflator, which normalized in H1FY25 after being unusually low in FY24.

How a deflator works in an economy 

The deflator, a broad measure of inflation in the economy, is derived from a weighted index of WPI and CPI inflation (roughly 65:35) compared with the previous year’s index to calculate growth.

Analysts noted that the July-September growth number, falling short of market estimates by about 100 basis points, was heavily influenced by the deflator, which rose to 2.25% year-on-year in Q2FY25. By contrast, the deflator was under 1% in Q2FY24 and around 2% in Q1FY25.

Kunal Kundu, India economist at Societe Generale, commented: “The sharply lower real GDP print is because of normalising of the GDP deflator. The same culprit was to blame last year but in the other direction: real GDP growth was artificially propped up by an unusually low deflator and masked the ongoing slowdown, as can be seen from the nominal GDP data.”

In FY24, the deflator averaged 1.3%, resulting in a real GDP growth of 8.2%. However, nominal GDP growth that year was 9.6%, lagging behind the pre-pandemic growth of 10.6% in FY19. Kundu highlighted that even when real GDP growth approached 8%, nominal GDP was at a near-two-decade low (excluding the pandemic year).

Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership, added: “As deflator is a function of WPI mostly, and partly CPI, it’s only natural that growth would be lower in FY25 (compared to last).”

Looking ahead, Upadhyay noted that the deflator’s impact in H2FY25 may be marginally higher than H1, with CPI inflation likely to average 5.1% and WPI expected to remain flat.

How RBI sees it

The Reserve Bank of India (RBI) forecasts CPI inflation to average 4.8% for the year, slightly up from earlier projections. Consequently, it has revised its GDP growth forecast for FY25 downward by 60 basis points to 6.6%.

In its December monetary policy statement, the RBI highlighted several positive factors for H2FY25, including strong kharif foodgrain production, favourable rabi prospects, industrial growth, and resilience in the services sector. These factors are expected to bolster private consumption. The RBI also expects investment activity to gather momentum, while robust global trade could support exports. However, it cautioned against risks stemming from geopolitical uncertainties, commodity price volatility, and geo-economic fragmentation.

According to DBS Bank, GDP growth is projected to rise to 6.8% in Q3FY25, supported by stronger industrial production, increased government spending, higher farm tractor and commercial vehicle sales, and improved trade. Senior economist Radhika Rao noted: “Based on high-frequency trends, we expect festivities-led related activities and a catch-up in government capex to boost growth in H2, registering a growth rate of 6.3% in FY25.”