The Government Might Need to Contribute to Increase Overall Demand

India’s Q4 FY25 GDP Shows Strong Growth at 7.4%

India’s GDP for the fourth quarter of FY25 experienced a notable growth of 7.4%, primarily fueled by robust investment activities. However, there was a deceleration in private consumption and a contraction in government expenditure. Analysts indicate that to maintain growth above 6.5% in FY26 amidst global uncertainties and sluggish consumer demand, both fiscal and monetary support might be essential.

Investment Drives GDP Growth

In Q4 FY25, the significant increase in gross fixed capital formation (GFCF), which rose by 9.4%—the highest in six quarters—was a major contributor to the impressive GDP growth. This surge in investment demand appears to have been bolstered by a seasonal rush among both central and state governments to fulfill their capital expenditure targets, along with a considerable push from the private sector. Nevertheless, concerns linger regarding the sustainability of this investment trend, particularly given the cautious sentiment in the private sector due to ongoing global uncertainties.

Sectoral Insights on Investment Demand

“The emergence of heightened investment demand is notable, yet it requires monitoring to ensure it becomes a consistent trend, particularly in light of economic unpredictability and the diminishing foreign investment demand as suggested by net FDI inflows,” commented Paras Jasrai, Associate Director at India Ratings. The Centre’s capital expenditure rose by 10.8% to Rs 10.5 lakh crore in FY25, exceeding the revised approximation of Rs 10.18 lakh crore for that year. D K Srivastava, Chief Policy Advisor at EY India, emphasized, “To maintain momentum in capital expenditure, the Union government should restore growth levels complemented by a continuation of the repo rate reduction, enabling fiscal and monetary policies to ensure that India’s real GDP growth does not dip below 6.5% in FY26.”

Private Consumption Dynamics

On a contrasting note, private consumption growth reached a five-quarter low, registering just 6% year-on-year in Q4 FY25. This slowdown is attributed to a decline in growth at the higher income levels, according to Jasrai. The FMCG sector witnessed a moderation in sales volume during this quarter, with urban regions experiencing a modest growth of 2.6% year-on-year—less than one-third of the rural growth rate. Additionally, a sharp reduction in imports signals diminished spending from higher-income demographics.

Positive Factors for Future Outlook

Despite the softness in private consumption, several positive factors such as reduced inflation, lower interest rates, and tax reductions are expected to contribute to an optimistic outlook, as noted by Rajni Thakur, Chief Economist at L&T Finance. The rural real wage growth in agriculture continued its upward trend for the third consecutive quarter in Q4 FY25, averaging 3.7% year-on-year in January-February 2025, marking the fastest growth rate since Q2 FY20, according to Jasrai.

Government Expenditure Trends

In contrast, government consumption expenditure experienced a year-on-year decline of 1.8% in Q4 FY25, the steepest drop since Q1 FY22, largely due to the base effect (as Q4 FY24 growth was 6.6%) and fiscal consolidation efforts. Despite an uptick in capital expenditure, the Centre’s overall spending amounted to Rs 46.55 lakh crore, reflecting a 1.3% decrease compared to the revised estimate of Rs 47.16 lakh crore for the year.