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The Indian economy has demonstrated resilience and an upward trajectory, with a notable acceleration in GDP growth during the third quarter of fiscal year 2025. According to Morgan Stanley's analysis, the GDP quickened to 6.2% year-over-year (YoY) in Q3FY25, a significant improvement from the 5.6% trough observed in Q2FY25. This positive momentum is expected to persist, with projections indicating a growth rate of around 6.7% in the fourth quarter (QE March). Several factors contributed to this robust performance, including increased rural consumption driven by a favorable monsoon season and heightened government spending. The government's upward revision of its growth forecast for FY25, now projecting a 6.5% expansion, further underscores the optimistic outlook for the Indian economy.
Upasana Chachra, Chief India Economist at Morgan Stanley, highlighted that the Q3 GDP figure slightly exceeded their internal estimate of 6% and aligned with consensus expectations of 6.2%. A detailed examination of the economic data reveals that the uptick in GDP was primarily fueled by the strength of both private consumption and government consumption. Private consumption experienced a notable surge, supported by a buoyant rural economy, while government consumption reached a five-quarter high, reflecting a pickup in government spending. In contrast, gross capital formation remained relatively stable, hovering around previous-quarter levels at 5.7% YoY. Furthermore, net exports made a positive contribution to GDP, as export growth outpaced import growth. The second advance estimates for 2025 suggest a slightly higher growth rate of 6.5% YoY compared to the first advance estimates of 6.4% and Morgan Stanley's estimate of 6.3%. This subtle upward revision reflects a growing confidence in the sustainability of the economic recovery.
The supply side of the economy also exhibited encouraging signs, with Gross Value Added (GVA) advancing to 6.2% in Q3FY25, up from 5.8% in the previous quarter. This broad-based growth across various sectors further corroborates the overall positive economic sentiment. The agriculture sector, in particular, demonstrated remarkable performance, growing at 5.6% YoY in Q3FY25, the highest rate since September 2023. This robust growth was attributed to a strong monsoon season, which provided ample support to both summer and winter crops. Within the industrial sector, manufacturing activity and electricity, gas, and consumption experienced growth, while construction activity moderated slightly compared to the previous quarter. The service sector was spearheaded by improvements in trade, hotel, transport, and communication services, which were buoyed by the holiday season. Other service subsectors remained relatively stable at previous-quarter levels. Core GVA edged up to 5.8% YoY in Q3FY25 from 5.6% in Q2FY25, indicating underlying strength in the core sectors of the economy.
On an annual basis, GVA growth for FY25 was revised upward to 8.6% (from 7.2%), and GDP growth was revised to 9.2% (from 8%). This significant upward revision highlights the improved economic outlook for the entire fiscal year, reflecting the strong performance observed in the third quarter and the positive momentum expected to continue in the fourth quarter. Morgan Stanley emphasized that the GDP print for QE Dec-24 reaffirms their view that the economy is in recovery mode, having bottomed out in QE Sep-24. High-frequency data for January and February suggest a mixed trend with gradual signs of recovery. The confluence of several favorable factors, including a supportive fiscal policy that prioritizes both capital expenditure (capex) and consumption, an easing monetary policy across various levers (rates, liquidity, and regulations), and robust services exports that augur well for the job market outlook, are likely to contribute to sustained growth momentum. The brokerage firm forecasts FY26 growth to be around 6.3%, indicating a gradual moderation in the growth rate as the economy stabilizes.
Looking ahead, Morgan Stanley identified three key monitorables that economists and experts will be closely observing. First, trends in government spending across both revenue and capital expenditure will be crucial. The level and composition of government spending can significantly impact economic growth, particularly in infrastructure development and social programs. Second, domestic liquidity and financial conditions will be closely scrutinized. Adequate liquidity in the financial system is essential for supporting investment and economic activity. Finally, the external environment, particularly trade and tariff developments and the Federal Reserve's policy decisions, will be closely watched. Changes in global trade patterns and monetary policy can have significant implications for the Indian economy.
While government expenditure was muted during the first two quarters of the fiscal year due to the general elections, it surged to Rs 2.7 lakh crore, posting about a 30% increase in comparison to the average of the first two quarters. The Economic Survey document stated that the capital expenditure of the government for FY25 has been budgeted at about 3.3 times the capex of FY20. The report highlighted that in Q1FY25, constraints on new approvals and spending during the general elections, coupled with heavy monsoon in many regions, affected the progress of infrastructure spending. However, between July and November 2024, the pace of capex picked up, suggesting a renewed focus on infrastructure development.
The Reserve Bank of India (RBI) has recently announced several measures to address domestic liquidity conditions and smooth INR volatility. These measures include an OMO purchase calendar (alongside doing OMO buys on screen), a long-dated VRR, and a USDINR buy/sell swap. In its December 2024 MPC meeting, the central bank also announced a 50 basis point (bps) cut in the cash reserve ratio (CRR) to 4%, aimed at injecting Rs 1.16 lakh crore into the banking system in two tranches. These proactive measures by the RBI demonstrate its commitment to maintaining financial stability and supporting economic growth.
Furthermore, Chief Economic Adviser V Anantha Nageswaran commended the RBI for spending dollars heavily in the forex market to defend the Indian rupee from falling sharply in recent months. He stated that these actions to defend the rupee and inject durable liquidity into the banking system are steps in the right direction. The central bank's intervention in the forex market increased after the Indian rupee started falling sharply due to factors like sluggish growth, widening trade deficit, rising crude oil prices, and a surge in the dollar index.
Finally, India is facing heightened uncertainty in the global arena, particularly with the potential transition to reciprocal tariffs by the Donald Trump-led US administration. India and many other economies are facing the threat of US reciprocal tariffs, which will be levied not just based on tariffs imposed by partner countries, but also the VAT, exchange rate deviation from market value, and non-tariff barriers. Goldman Sachs previously stated that the potential impact of the US tariffs on India's GDP will vary between 0.1 to 0.6 percentage points. This external risk factor necessitates careful monitoring and strategic policy responses to mitigate any potential negative impacts on the Indian economy. Overall, the Indian economy is demonstrating positive growth momentum, supported by favorable domestic policies and a resilient supply side. However, vigilance regarding key monitorables, including government spending, domestic liquidity, and the external environment, is essential for ensuring sustained and inclusive economic growth.