India’s Q3 GDP growth beats projections; prompts upward revisions for FY25

The Indian economy exhibited remarkable growth during the third quarter of the fiscal year 2023-24, surpassing expectations and defying projections. India’s GDP recorded a robust expansion of 8.4% during the October - December period, showcasing sustained momentum after achieving growth rates exceeding 8% in the two preceding quarters.

According to the official government data released on Thursday, the full-year FY24 GDP growth estimates have been revised to 7.6% from an earlier projection of 7.3%

Buoyed by strong private-sector investment and a pick-up in services spending, the Q3 GDP growth was even higher than the projections of the Reserve Bank of India (RBI) which projected real GDP growth for FY24 at 7% with Q3 at 6.5% and Q4 at 6%. 

A Mint poll by 17 economists had projected GDP growth at 6.6%.

Read here: India's Q3 GDP growth at 8.4%, beats D-Street estimates; economy grows at fastest pace in 6 quarters: 5 key highlights

Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India believes FY24 GDP growth to be near 8%.

“The third quarter GDP numbers jolted the psyche and cognitive framework of most in markets, while sweeping some by a pleasant surprise. Clearly, right policy prisms and perspectives can trump irrational expectations bordering fault lines. Based on the FY24, 7.6% GDP growth, we estimate Q4 GDP growth at 5.9%, which we believe is an understatement. Thus, it is most likely that FY24 GDP growth could be within striking distance of 8%,” Ghosh said.

However, there was a 190 basis points (bps) sharp wedge between GDP and gross value added (GVA) growth, which economists said, reflects a higher growth in government’s net indirect taxes, possibly with lower subsidies. The second estimate for FY24 puts real GDP 30 bps higher at 7.6%, even as real GVA is unchanged at 6.9%.

GVA growth was just 6.5% in October-December, down from 7.7% the previous quarter. Gross value added is GDP minus net taxes on products.

Also Read: India's surprising GDP growth rate leaves economists puzzled. Here's why

“Interestingly, even as FY24 nominal GDP growth is a tad higher than the first estimate of 9.1%, it is 10% lower in value terms. The implied Q4 GDP/GVA growth print will slow to 5.9%/5.4%, indicating most of the growth moderation is borne by Q4. That said, production-side GVA growth is relatively less volatile and the massive GDP-GVA wedge in FY24 will likely normalize by next fiscal,” said Madhavi Arora, Lead – Economist at Emkay Global Financial Services.

FY25 GDP Estimates 

Meanwhile, the blowout Q3 GDP data prompted economists to raise their growth projections for FY25, while most of them expected FY24 GDP growth to be within striking distance of 8%.

UBS raised its estimates for FY25 real GDP growth to 7% from 6.2% earlier.

“India's economy continues to show resilience, with real GDP growth surpassing expectations at 8.4% YoY in the December quarter of 2023. This robust growth, coupled with positive signals from leading indicators, prompts us to revise our FY25 GDP growth forecast upward to 7% YoY. While consumption growth remains subdued, we anticipate a gradual recovery, especially in the premium and rural segments,” said Tanvee Gupta Jain, UBS India Economist.

Going into FY25, she expects consumption growth to marginally recover with urban demand normalising but the premium/affluent segment continuing to do well and rural demand recovering on normal monsoons. The investment recovery will likely become more broad-based.

“While growth in public capex will likely moderate, we expect residential housing to remain supportive and revival in private corporate capex to gain traction post-elections. Lastly, we forecast exports (of goods and services) to improve marginally on improvement in global goods import volume and resilient services exports,” Jain said.

Also Read: December quarter, when GDP beat every forecast

Economists at Kotak Institutional Equities pencil in GDP growth at 6.6% in FY25 from an earlier 6.3% estimate, factoring in the centre’s continued capex thrust (albeit at a slower pace) along with states’ capex, delay in the timing of global growth slowdown and continued tepid consumption growth.

“Over the medium term, we expect GDP growth at 6.5%, as drivers remain broadly in line with current trends,” they said.

Barclays raised its FY24 GDP growth forecast by 110 basis points to 7.8%. The bank's economists also revised upward their prediction for FY25 by 50 bps to 7%.

Scope for RBI?

Analysts believe India's economic growth seems to have entered a sweet spot with a contained current account deficit and inflation being on a decelerating trend. However, markets will look for further action by the RBI on policy rates in FY25 in lieu of global monetary easing. 

“The robust real GDP growth suggests that policy conditions will remain tight in the April policy and RBI will likely shift its policy stance to “neutral” in the June policy. While we maintain our call for a shallow rate cut cycle in FY25 (cumulative 50 bps), following the Fed pivot in May (UBS forecast) and as India’s real policy rate also starts inching into restrictive territory (amid faster-than-expected disinflation), it seems the MPC may not be in any hurry to change policy settings,” said UBS’ Jain.

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