Structural factors behind H1 slowdown; brighter outlook for H2: FinMin

After a slowdown in Q2 FY25, the outlook for Q3 looks promising, driven by the performance of high-frequency indicators (HFIs) in October and November 2024. As growth indicators show positive momentum, the government expects the Indian economy is projected to grow at approximately 6.5% in real terms for FY25.

Underlining positive factors like rabi sowing and expected traction in industrial activity could help sustain economic momentum. "An increase in Minimum Support Price (MSP) for rabi crops, high reservoir level and adequate fertiliser availability bodes well for rabi sowing. Industrial activity is likely to gain traction," the Ministry of Finance says.

It says there are good reasons to believe the outlook for growth in H2 of FY25 is better than seen in H1. At the same time, the possibility that structural factors may also have contributed to the slowdown in H1 should not be ruled out. "The combination of monetary policy stance and macroprudential measures by the central bank may have contributed to the demand slowdown. It is good news that the central bank lowered the cash reserve ratio from 4.5 per cent to 4 per cent in its policy meeting in December 2024," the ministry says in its monthly economic review.

Expanding on what growth indicators show, the ministry says the purchasing manager's index (PMI) for October and November 2024 indicates growth as it remained firmly in the expansionary range, supported by new business growth, strong demand, and advertising efforts. "The conclusion of the monsoon season and the expected increase in government capital expenditure are expected to support the cement, iron, steel, mining, and electricity sectors."

The services sector, too, continues to perform well, with PMI services being in an expansionary zone in October and November 2024. The RBI's decision to lower the cash reserve ratio or CRR should help boost credit growth, which has slowed a little too much and quickly in FY25, says the ministry.

A major factor contributing to a positive growth forecast is rural demand, which remains resilient. This is highlighted by 23.2% and 9.8% growth in two & three-wheeler sales and domestic tractor sales, respectively, in October-November 2024. "The farm sector outlook is optimistic, generating hopes that food price pressures will decline gradually."

The ministry says the urban demand is picking up, with passenger vehicle sales registering YoY growth of 13.4% in October-November 2024 -- and domestic air passenger traffic witnessing robust growth. "Hiring and compensation practices in the corporate sector have also played their part in slowing urban consumption growth."

The RBI’s consumer confidence survey also points towards consumer optimism regarding the general economic situation, employment, and prices in the year ahead. On the inflation front, the RBI has projected CPI inflation at 4.8 per cent for FY25, with Q3 at 5.7 per cent and Q4 at 4.5 per cent.

Threats to India's growth

The ministry cautions that many major economies' global uncertainties and aggressive policies "threaten domestic growth". Looking into FY26, the ministry says newer uncertainties have emerged as global trade growth is looking more uncertain than before and elevated stock markets continue to pose a "big risk". The strength of the US dollar and a rethink on the path of policy rates in the United States have put emerging market currencies under pressure. "Sustaining growth will require a deeper commitment from all economic stakeholders to growth."