India’s Q2FY25 GDP Slows: What it Means for You

The big macro numbers for the second quarter of the current fiscal year (Q2FY25) are in, and sadly, they don’t look great. At 5.4%, India’s economic growth (Gross Domestic Product) has slowed more sharply than anticipated. After seven quarters, GDP growth has plunged below the 6% mark. To add to the woes, the growth rate is far lower, nearly 1%, than was predicted by economists, clearly reflecting a momentary slowdown. 

Is it a cause of worry? Let’s unpack what’s happening, what it means for the economy, and how you can navigate it as an investor.

India’s GDP Growth Slows to 5.4%: What Happened?

According to the data released by the Ministry of Statistics and Programme Implementation (MoSPI), India’s real GDP growth decelerated to 5.4% in July-September. This marks a slowdown from 6.7% in Q1 and a healthy 8.2% growth in FY24.  Real GDP means inflation-corrected GDP or a constant-currency GDP. The government of India had projected the real GDP to grow between 6.5–7% in 2024-25. 

Point to Ponder Over: Real GDP or GDP at Constant Prices in Q2 of 2024-25 is estimated at ₹44.10 lakh crore, against ₹41.86 lakh crore in Q2 of 2023-24, thus, showing a growth rate of 5.4%.

Moreover, the gross value added (GVA), a more stable indicator of economic activity, grew 5.6% year-on-year, down from 6.8% in the previous quarter, further underscoring the widespread deceleration across sectors.

What led to this slowdown? 

The most significant impact on the growth came from the manufacturing and mining sectors. 

Manufacturing Struggles: A challenging global environment and subdued domestic demand hit manufacturing, which saw muted growth of 2.2% from 7% in the previous quarter. Moreover, the November PMI data (an economic indicator that shows trends in both the manufacturing and services sectors) showed signs of slower expansion in production.

Mining Sector Contracts: The ​​mining & quarrying sector has also dragged down growth prospects, which contracted by 0.1% during this period. The decline in this sector’s output negatively impacted the industrial segment of the economy. Factors such as extended rainfall adversely affected mining activities, leading to reduced production.

High Food Inflation: This is a significant factor impacting overall consumption spending. Food prices, which make up nearly half of the total inflation basket, are surging as uneven rains disrupted production. October’s inflation was severely hit because food inflation rose to 10.87%, which reduced the purchasing power of middle-income households, affected Indian Inc’s earnings and hurt the GDP overall.

Export and Import Headwinds: Exports dropped as global demand softened, especially from key markets like the US and Europe, and global policy changes. The exports have slowed by 2.8% in the second quarter, while the imports have contracted by 2.9%, indicating a slowdown in capital formation.

Private Consumption Slows: Low wage growth, especially in the IT sector, has impacted the purchasing power of the people and, thus, the manufacturing sector. As data showed, growth in private final consumption expenditure, which accounts for 60% of India’s GDP, declined to 6% in Q2FY25 from 7.4% in Q1FY25. This was mainly due to a drop in urban demand. However, it is an increase from the 2.6% growth rate recorded in the previous financial year. Looks like there are signs of a rebound in consumption growth going forward.

Imports Dumping Impact: Dumping refers to the exercise of a country exporting its products at a price lower than its domestic price. Exporters dump to compete with the producers and sellers in the importing country. In the Indian context, it means that countries such as the US, China, etc, are exporting their products to India at lower prices, hurting the domestic industries due to a surge in cheap imports. 

Rising Borrowing Costs: High interest rates impacted investments and consumer spending, further tempering growth. The Reserve Bank of India (RBI) had projected GDP growth for FY25 at 7.2%, with Q2 at 7%. However, the sluggish growth may compel the central bank to revisit its stance on interest rates, which has held steady since May 2020.

What is working for India’s GDP?

The Q2 GDP data might have been a shocker for economists, but some positive signs can potentially restore resilience to the world’s fastest-growing major economy.

Green from Agri: A bright spot! The agricultural sector continued to shine, showing improvement with 3.5% YoY growth in Q2, after sub-optimal growth rates ranging from 0.4% to 2% during the previous four quarters. This indicates that the next quarter (October-March) will also remain favourable. 

Construction Remains Strong: Construction catalyses growth in allied industries such as cement, steel, and logistics and boosts employment opportunities. It has been so far resilient, with a growth rate of 7.7% in the second quarter. 

Therefore, in one line, the GDP slowdown is a bump, not a blockade.

What this Means for Investors

The GDP slowdown should be viewed as a momentary pause rather than a trend reversal.

Key takeaways:

Shift in Market Sentiment: The slowdown might temper market exuberance in the short term, leading to cautious investor sentiment. However, domestic-centric sectors like FMCG, healthcare, and banking are expected to remain resilient.

Caution on Exports: Sectors like IT and pharma may face temporary challenges due to weak global demand. Sticking to fundamentally strong companies can weather economic cycles.

Rupee Pressure: The slowdown could weaken the rupee slightly. Diversifying across asset classes and geographies can help.

In a nutshell

Despite weak Q2 performance, there is a silver lining for long-term investors. At first glance, India’s quarterly GDP growth figure might seem alarming. Still, a closer look reveals that this dip is likely a temporary blip, influenced by seasonal trends and election-related factors.

For investors, a diversified portfolio across equities, bonds, and assets can mitigate risks from a domestic slowdown.