Key View
- Thanks largely to an investment surge, GDP rose by 7.4% y-o-y in Q1 2025, leaving the economy 6.5% larger in FY2024/25, than in the previous fiscal year.
- Tariff uncertainty means the outperformance in investment probably will not last; the Bank Lending Survey point to lower loan demand from the manufacturing sector.
- The external sector remains exposed to tariffs and ever-tighter consumer loan restrictions means real GDP growth should slow to 6.0% in FY2025/26.
Real GDP outperformed most analyst estimates and grew by 7.4% y-o-y (BMI 5.5%, Reuters Consensus 6.7%) in Q1 2025/Q4 FY2024/25 (April-March) and left the economy 6.5% larger than it was the previous fiscal year. Despite Prime Minister Narendra Modi’s stating on May 27 that India had become the fourth largest economy, overtaking Japan, it probably has not done so, remaining at fifth place with nominal GDP of USD3.9trn, behind Japan’s USD4.0trn in 2024. As for FY2025/26, we are maintaining our growth forecast at 6.0% for now, which was previously revised down from 6.6% in April following the “Liberation Day” tariffs.
The key driver of the outperformance was investment, which nearly doubled its growth contribution to 3.1 percentage points (pp) (see chart below). From a production perspective, the momentum was supplied by a 0.4pp jump in growth contribution from the construction sector to 1.1pp, while that of the manufacturing sector rose 0.3pp to 0.9pp.
India’s growth forecast for the fiscal year 2025/26 remains steady at 6%, reflecting optimism about the nation’s economic resilience and potential. Despite global uncertainties, India has managed to maintain a robust trajectory, supported by strong domestic consumption and a dynamic services sector. This growth projection underscores confidence in India’s ability to navigate external challenges while leveraging internal strengths.
Key to achieving this forecast is the government’s focus on structural reforms, digital transformation, and infrastructure development. Initiatives aimed at boosting manufacturing through the “Make in India” campaign, combined with investments in renewable energy, are expected to drive economic momentum. Additionally, efforts to enhance the ease of doing business and attract foreign direct investment are crucial components of sustained growth.
However, achieving this target is not without challenges. Inflationary pressures, rising commodity prices, and global geopolitical tensions pose potential risks. Addressing these issues through prudent monetary policy and fiscal prudence will be essential. Maintaining a 6% growth rate would signify resilient economic management and strategic foresight in leveraging opportunities while mitigating risks.
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