India’s GDP growth has slowed to a five-quarter low of 6.7% year-on-year (YoY) for the first quarter of FY25, slightly below the consensus estimate of 6.9% and significantly down from 8.2% in the same quarter last year. This decline can be attributed to several factors, including a challenging base effect and particularly weak government spending, especially in capital expenditure, likely influenced by the ongoing election season.
However, there is a silver lining: private consumption has surged, reaching a seven-quarter high, driven by a robust recovery in rural spending and sustained urban demand for discretionary goods and services. Notably, the investment rate has jumped to 34.9% of GDP, the highest level in 47 quarters.
The industrial sector has also shown signs of improvement, with the Index of Industrial Production (IIP) growing by 4.8% YoY in July 2024. This growth was primarily supported by the manufacturing and electricity sectors, where 17 out of 23 manufacturing industries reported positive growth, including five with double-digit increases. Capital goods production surged to a nine-month high, indicating a renewed focus on investment. However, the continued contraction in consumer non-durable goods growth remains a concern.
On the inflation front, retail inflation edged up slightly to 3.7% YoY in August, primarily driven by rising food prices, which increased by 5.3% YoY. While core inflation remains stable at 3.4%, the rise in food prices can be attributed to higher costs for pulses and vegetables. The fuel and light segment has experienced sustained deflation over the past year. Looking ahead, inflation dynamics may shift due to high base effects, although risks related to food inflation persist, particularly with uneven rainfall patterns.
The fiscal deficit for the first four months of FY25 is also noteworthy, standing at 17.2% of the budget estimates, a significant improvement from 33.9% in FY24. This positive trend is largely due to robust collections in personal income tax, GST, and non-tax revenues, coupled with a sharp decline in capital expenditure, which fell by 17.6% YoY.
However, the merchandise trade deficit has widened to a ten-month high of $29.6 billion in August 2024, up 23.5% YoY, as exports contracted by 9.3% YoY while imports surged to a 26-month high of $64.4 billion. Notably, gold imports have nearly tripled sequentially to $10 billion, driven by lower customs duties and higher demand during the festive season.
Conversely, the oil trade deficit has decreased, reaching a three-year low due to a 32.4% YoY decline in oil imports. Meanwhile, the services trade surplus has risen to a seven-month high of $14.9 billion, benefiting from strong growth in services receipts.
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