India’s gross domestic product (GDP) growth decelerated to 5.4% in Q2 FY25, marking its slowest pace in nearly two years. The decline, reported by the National Statistical Office (NSO), highlights the challenges the economy faces from a weakening manufacturing sector, lower urban consumption, and external factors like inflation and high borrowing costs.

GDP Performance Overview

The 5.4% growth rate fell below economists' expectations of 6.5%, indicating significant headwinds for the Indian economy. It was sharply lower compared to 6.7% in Q1 FY25 and 8.1% in Q2 FY24, showing a clear slowdown across sectors.

Key figures from the report include:

• Gross Value Added (GVA) grew by 5.6% compared to 6.8% in the previous quarter.
• Private final consumption expenditure, which accounts for 60% of GDP, increased by 6% YoY, but showed a QoQ decline.

Sectoral Analysis

The economic slowdown was particularly evident in industrial and manufacturing activities, with other key sectors showing mixed performance.

1. Manufacturing Sector

• Growth fell to 2.2% YoY, a significant drop from 14.3% a year ago and 7% in Q1 FY25.
• Weak domestic demand, rising input costs, and inflation contributed to this decline.

2. Agriculture and Allied Activities

• Agricultural output grew by 3.5% YoY, improving from 2% in the previous quarter.
• This reflects resilience in rural demand despite urban consumption challenges.

3. Construction and Real Estate

• Construction sector growth moderated to 7.7% YoY, down from 13.6% a year earlier.
• The real estate sector grew by 6.7%, reflecting steady but slower expansion.

4. Services Sector

• Services, including trade and hospitality, grew by 7.1%, up from 6% YoY but slightly below 7.2% QoQ.
• This sector remains a strong contributor to GDP despite global economic challenges.

Factors Contributing to the Slowdown

1. Inflation Impact
   Urban consumption was hit by high food inflation, reducing discretionary spending.

2. High Borrowing Costs
   Rising interest rates have led to a decline in private investments and real wage growth.

3. External Trade Challenges
   Exports grew by only 2.8% YoY, down from 8.7% in Q1 FY25, reflecting global trade headwinds.

4. Decline in Mining and Utilities
   Mining and utilities sectors showed minimal growth, adding to the overall drag on GDP.

Positive Indicators

Despite the overall slowdown, there were some positive takeaways:

• Public Administration and Services grew by 9.2% YoY, up from 7.7% last year.
• Government Final Consumption Expenditure rebounded by 4.4%, providing some support to GDP.

Implications for Policymakers

The Q2 FY25 GDP results underline the importance of addressing inflation and reviving manufacturing activity to sustain economic growth. Policymakers may consider targeted fiscal measures and interest rate adjustments to counter the slowdown and stimulate urban consumption.

Outlook

While Q2 FY25 results signal challenges, improved agricultural performance and a steady recovery in global demand could provide some relief in the coming quarters. However, achieving higher growth rates will require robust interventions in key sectors like manufacturing, mining, and exports.

India’s economic journey remains resilient despite these hurdles, and Q3 FY25 will be critical for assessing the effectiveness of current policies and global market trends.

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