India’s Revised gdp growth Estimates

Context:

The Indian government recently released updated estimates of Gross Domestic Product (GDP) for the third quarter of FY25, along with revisions to past data. These revisions significantly alter the understanding of India’s economic trajectory, raising questions about the credibility and accuracy of initial estimates.

Key GDP Revisions and Growth Trends

GDP Growth in Q3 FY25 and Revisions for Past Years
- Q3 FY25 GDP growth: 6.2% (compared to 5.6% in Q2 FY25).
- Q2 GDP growth revised upwards: From 5.4% to 5.6%.
- FY24 GDP revised significantly: From 8.2% to 9.2%.

Why Are GDP Estimates Revised?

Initial estimates are based on limited data and assumptions, requiring periodic updates as more accurate information becomes available.
The government follows a structured revision process, with five rounds of GDP estimates:
- First Advance Estimates (FAE): Released in January of the ongoing financial year.
- Second Advance Estimates (SAE): Released in February.
- Provisional Estimates (PE): Includes Q4 data, released in May.
- First Revised Estimates (FRE): Released in February of the following year.
- Final Estimates: Released in February, two years later.

FY23 GDP revised upwards: From 7% to 7.6%.

Trends in Economic Growth
- India’s GDP growth decelerating: From 9.2% in FY24 to an estimated 6.5% in FY25.
- Private consumption demand revised upwards: From 4% to 5.6% in FY24, indicating stronger-than-expected consumer spending.
- Government spending and exports play a crucial role in sustaining growth.

Factors Influencing GDP Growth

Drivers of Growth
Private Consumption:
- Largest contributor to GDP.
- Increased from 5.7% in Q3 FY24 to 6.9% in Q3 FY25.
Government Expenditure:
- Increased by 8.3% in Q3 FY25 (compared to 2.3% in Q3 FY24).
Exports:
- Strong growth of 10.4% in Q3 FY25 (compared to 3% in Q3 FY24).
- Decline in imports by 1.1% due to rupee depreciation.

Concerns and Challenges:

Investment Slowdown: Gross Fixed Capital Formation (GFCF) growth fell from 9.3% (Q3 FY24) to 5.7% (Q3 FY25).
- Indicates slower industrial expansion and infrastructure development.
Sharp Growth Deceleration: GDP growth slowed from 9.2% in FY24 to 6.5% in FY25.
- Implies weaker economic momentum.
Uncertainty Over Q4 FY25 Projections: Required Q4 GDP growth of 7.6% to meet FY25 target appears ambitious.
- Dependent on export spike, capital expenditure, and Maha Kumbh-led consumption boost.
Global Economic Risks: Trade policies of major economies may fuel inflation and financial volatility.
- Uncertain global demand could impact India’s exports.

Implications of GDP Revisions

Macroeconomic Implications
- Higher private consumption demand: Indicates stronger economic resilience.
- Sharp GDP revisions raise credibility concerns: Large upward revision in FY24 GDP (from 8.2% to 9.2%) questions the reliability of initial estimates.
- Impact on tax revenues and corporate profits: Weaker GDP growth may lead to lower tax collection and subdued corporate earnings.
Stock Market and Investor Sentiment
- Foreign investors remain cautious due to lower-than-expected corporate earnings.
- The government’s optimistic growth estimates contrast with economist forecasts, adding uncertainty.