According to an ICRA analysis, heavy rains and weak margins are projected to counterbalance the boost from the government’s capital spending turnaround and the positive trends in kharif sowing, causing GDP growth to drop to 6.5% in Q2FY25 from 6.7% in Q1FY25. Furthermore, the report’s findings indicate that the gross value added (GVA) is expected to ease from 6.8% in Q1FY25 to 6.6% in Q2, with the industrial sector driving the growth (from +5.5% to +8.3%), while services (from +7.2% to +7.8%) and agriculture (from +3.5% to +2.0%) sectors also picking up steam.

ICRA stated that the growth in net indirect taxes (in nominal terms) is projected to increase somewhat to 9.0-9.5 percent in Q2 from 8.0 percent in Q1 based on data currently available for the Center and the states’ indirect taxes and subsidies. As a result, it is anticipated that the GDP-GVA growth wedge would continue to be inverted in real terms in Q2 of FY2025.

According to Aditi Nayar, Chief Economist, Head-Research & Outreach, ICRA, “Q2 FY2025 saw tailwinds regarding a healthy expansion in sowing of major kharif crops and a pick-up in capital expenditure following the Parliamentary Elections.” Heavy rainfall caused challenges for a number of industries, including mining, retail foot traffic, consumption of electricity, and a decline in item exports. Additionally, it seems that business margins across a range of industries have fallen this quarter. We therefore forecast a minor slowdown in India’s GDP and GVA growth in Q2 FY2025, to 6.6% and 6.5%, respectively.

The positive kharif output and refilled reservoirs are expected to contribute to a long-term improvement in rural attitude, and the advantages of the robust monsoons are yet to come. The GoI’s capital expenditures also have a lot of space; they must increase by 52% year over year in H2 FY2025 in order to reach the full-year budget estimate. We do, however, keep an eye on how a slowdown in the expansion of personal loans may affect private spending and how geopolitical events may affect commodities prices and foreign demand. Overall, according to ICRA, a back-ended increase in economic activity will accelerate GDP and GVA growth in H2 FY2025, leading to full-year expansions of 7.0 and 6.8 percent, respectively,” Aditi Nayar continued.

In Q2, ICRA projected that industrial GVA growth would moderate broadly to 5.5%, driven by manufacturing, construction, mining and quarrying, and electricity.

Despite the tardy execution of infrastructure projects due to excess monsoon rainfall, India’s investment activity improved in Q2 FY2025 compared to Q1. After a 35.0 percent decline in Q1FY25, the GoI’s capital expenditures returned to a YoY rise of 10.3 percent YoY in Q2FY25 (Rs 2.3 trillion). The pace of expansion remained modest even though the total capital outlay and net loans of the 22 state governments (apart from Arunachal Pradesh, Gujarat, Goa, Jharkhand, Manipur, and Odisha) increased by 2.1% YoY in Q2.

ICRA added that new project announcements saw a strong recovery from a multi-quarter low of Rs 2.2 trillion in Q1 to Rs 6.7 trillion in Q2. This was consistent with past patterns, which showed that following the slowdown before the Parliamentary Elections, new proposals increased significantly in Q2.

Amidst a mixed trend in the high frequency indicators, ICRA projected the services GVA’s YoY growth to increase to 7.8% in Q2. ICRA stated that the GVA growth of agriculture, forestry, and fisheries is anticipated to increase to approximately 3.5% in Q2 FY25, bolstered by favorable trends for kharif sowing, early estimates showing a 5.7% jump in kharif foodgrain output, and a low base.