Quick Read
- India’s GDP grew by 6.5% in FY25, its slowest in four years, but Q4 saw a surprising 7.4% expansion.
- Sectors like construction and manufacturing showed resilience, while urban consumption remains a challenge.
- Experts foresee FY26 growth at 6.2–6.5%, contingent on strong domestic demand and policy support.
India’s economy delivered a surprise performance in Q4 FY25, registering a 7.4% GDP growth rate. Despite this late-year boost, the overall fiscal year growth slowed to 6.5%, the lowest in four years, according to data highlighted by Livemint. This dual narrative—marked by resilience in some sectors and challenges in others—points to a complex recovery story for Asia’s third-largest economy.
What drove India’s Q4 FY25 GDP growth?
The stronger-than-expected Q4 performance was fueled by multiple factors. Gross fixed capital formation (GFCF) saw a sharp rise of 9.4%, signaling robust public and private investment, noted Livemint. Indirect tax collections surged, while a 12.7% year-on-year drop in imports boosted net exports. On the production front, construction grew by a remarkable 10.8%, and manufacturing rose by 4.8%, both contributing significantly to the late-year momentum.
“The uptick reflects the cumulative impact of government-led capital expenditure and healthy corporate earnings,” stated Rajni Thakur, Chief Economist at L&T Finance, in a report by Businessworld. However, private consumption—an essential driver of India’s economy—remained subdued, dampening the celebratory mood.
Why is private consumption lagging?
While rural demand benefited from robust agricultural output and softer food inflation, urban consumption continues to face hurdles. According to CareEdge Ratings, the services sector, particularly IT, has seen a sharp slowdown in wage growth, further straining household budgets. In Q4 FY25, private final consumption expenditure (PFCE) grew by 6.0%, a dip from the previous quarter.
Dharmakirti Joshi, Chief Economist at Crisil, emphasized the need for policy interventions to stimulate demand. “Interest rate cuts and middle-class tax benefits could bolster urban consumption in FY26,” he noted in Livemint. Despite these challenges, analysts remain cautiously optimistic, citing the favorable monsoon forecast and lower inflation as potential tailwinds for the coming year.
Infrastructure and manufacturing emerge as key sectors
Amid consumption-related concerns, infrastructure and manufacturing sectors have shown remarkable resilience. Construction activity hit a six-quarter high, supported by robust public capex allocations earlier in the fiscal year. Manufacturing also gained traction, with listed companies posting 12% EBITDA growth in Q4 FY25, according to Businessworld.
Anand Shah, CIO-PMS at ICICI Prudential AMC, noted in Businesstoday that infrastructure-linked sectors offer long-term growth opportunities. “Government initiatives and rising capex have positioned these sectors as attractive investment avenues,” he said.
What lies ahead for FY26?
Looking forward, analysts project India’s GDP growth to range between 6.2% and 6.5% in FY26. Key drivers include sustained infrastructure activity, improved agricultural output, and potential monetary easing by the Reserve Bank of India (RBI). However, the risks remain tilted downward, with global uncertainties and uneven domestic demand posing challenges.
“Without stronger urban consumption, sustaining high growth will be difficult,” warned Rumki Majumdar, Economist at Deloitte India, in Livemint. Both the State Bank of India (SBI) Research and CareEdge Ratings have underscored the need for structural reforms to ensure a balanced recovery.
Exports, which grew by 3.9% in Q4 despite global headwinds, also hold promise. However, geopolitical risks could weigh on trade performance in FY26, experts noted.
India’s Q4 FY25 performance showcased the economy’s resilience but also highlighted structural challenges, particularly in private consumption. As the nation gears up for FY26, a balanced approach—bolstered by policy support and consumer confidence—will be critical to sustaining growth.