With government spending picking up, consumption set to recover, and food inflation moderating, India’s economy is likely to regain momentum in the months ahead, bringing growth back on track for the remainder of FY25.
Morgan Stanley analysis suggests that while the economy faced challenges in Q3, it expects India’s GDP growth to improve to 6.7 per cent YoY in the December 2024 quarter and 6.8 per cent in March 2025, from 6.3 per cent YoY in the September 2024 quarter.
Despite challenges such as contraction in government spending and weather disruptions, Morgan Stanley assumes that the country’s economic recovery is likely to be driven by a resurgence in government spending, with a sharp decline in the government’s cash surplus with the Reserve Bank of India indicating that expenditure picked up significantly in October and November.
Central government spending growth is anticipated to reaccelerate to 16.6 per cent year-on-year between October 2024 and March 2025, with capital expenditure set to rise by 52 per cent, compared to a contraction of 15.4 per cent in the first half of FY25, noted the US-based brokerage.
Along with the government’s fiscal push, weather conditions have stabilised, and the distortions caused by the timing of festivals are now behind. The urban job market is also showing signs of recovery, with improved job creation in the IT sector, particularly as US capital expenditure in the tech sector begins to reflect positively on Indian IT exports.
Meanwhile, Morgan Stanley also assumes food inflation, which had been a drag on consumer spending, to moderate in the coming months, restoring some purchasing power to urban households. Although unsecured personal loan growth remains low, the risk of further regulatory tightening has diminished, offering a potential boost to consumer confidence.
The investment bank’s outlook further suggests that the slowdown in the third quarter was more of a temporary “soft patch” than the start of a prolonged economic slump.
One of the primary reasons for the slowdown, noted the investment bank, was a significant contraction in government spending, which accounts for 28 per cent of India’s GDP. This decline began in May, coinciding with the general elections. While the central government had budgeted an 8.5 per cent increase in spending for the fiscal year 2025, actual expenditure between April and September showed a decline of 0.4 per cent.
This shortfall was particularly evident in capital expenditure, which had been a key driver of growth in previous years. Additionally, the narrowing of the central government’s fiscal deficit, by 1.2 percentage points between May and September, was more pronounced than in past years, adding further strain to economic activity, according to the Stanley Morgan report.
Weather disruptions also played a role, with excessive rainfall in August—up 81 per cent year-on-year—hampering industrial and construction activity. This also delayed the rollout of government expenditure projects.
In addition, the shifting dates of major festivals, such as Shradh and Diwali, caused distortions in the economic data, further complicating the growth picture during the August-October period.
On top of these external factors, cyclical weaknesses in consumption also weighed on growth. High food inflation, which peaked at 10.9 per cent in October, reduced purchasing power, particularly in urban areas. This was compounded by a slowdown in urban hiring, especially within the IT and services sectors, as well as a tightening of credit conditions.
The Reserve Bank of India’s measures to cool down unsecured personal loan growth (which slowed from 27 per cent year-on-year in Q3FY23 to just 12 per cent in Q3FY24) also dampened discretionary spending, further constraining consumption.
