Capital formation in H2, FY25 likely to be higher than NSO estimates: ICRA

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Resilience in rural demand, dissipation of excess rains, and a low base in some sectors are likely to provide a fillip to some sectors

The NSO estimates the nominal GDP to expand by 9.7% in FY2025
The NSO estimates the nominal GDP to expand by 9.7% in FY2025 | Credits: Fortune India

Ratings agency ICRA Ltd said that some sectoral numbers, including the gross fixed capital formation (GFCF), may see higher growth than the numbers pegged in the first advance estimates of the economy for 2024-25 released on Tuesday by the national statistics office. Resilience in rural demand, dissipation of excess rains, and a low base in some sectors are likely to provide a fillip to some sectors, the agency points out.

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"The NSO’s First Advance Estimate (FAE) for India’s GDP and GVA growth of 6.4% each in FY2025, is slightly lower than our forecast of 6.5% each, led by mining, manufacturing, and services. The NSO has effectively implicitly pegged the growth in the GDP and GVA for H2 FY2025 at 6.7% and 6.6%, respectively, a mild 10-20 bps lower than our projections for the same,” said Aditi Nayar, chief economist and head - Research & Outreach, ICRA Limited.

“While the NSO’s implicit H2 FY2025 projections seem reasonable, some of the sectoral numbers could report higher growth prints in H2 FY2025, in our view,” she added.

“For instance, the growth rates for the mining, manufacturing and THTCS segments are likely to exceed the assumed rates, given the dissipation of the adverse impact of excess rains that impacted growth in Q2 FY2025, the anticipated uptick in rural demand, and favourable base effect in some segments,” she said.

With elections done, capital expenditure is also likely to pick up. “Similarly, on the expenditure side, GFCF growth is likely to turn out to be higher than the NSO’s implicit estimate of 6.4% for H2 FY2025, amid expectations of a pick-up in government capex and some improvement in private capex activity, which were adversely impacted owing to the elections in H1 FY2025,” she added.

“The NSO estimates the nominal GDP to expand by 9.7% in FY2025, lower than our estimate of 10.2% for the fiscal. Given the expectations of a large miss in the capex target, we expect the GoI’s fiscal deficit print to trail the FY2025 RBE, which would largely offset the lower-than-budgeted nominal GDP print; consequently, we expect the fiscal deficit to GDP ratio to only marginally trail the budget estimate of 4.9% for the fiscal,” Nayar said.

“In our view, the GDP growth in FY2026 will be crucially influenced by global uncertainties as well as domestic uncertainties, amidst considerable base effects. Benefitting from an anticipated capex push in the upcoming Budget, we project the GDP growth at 6.5% in FY2026,” she said.   

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