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Systematix Research's recent report presents a cautious view of India’s GDP growth for the January-March quarter of 2024-25, highlighting underlying weaknesses despite a seemingly strong headline figure.

According to the analysis, the growth remains heavily reliant on government expenditure, particularly in construction, while the manufacturing sector continues to struggle. The report states, “The upside surprise in Indian 4QFY25 GDP growth makes a robust headline, but it masks underlying weaknesses. It continues to be dependent on public spending-led construction.”

Several indicators suggest that the official GDP numbers may not fully capture the economic reality. For instance, the slower expansion of the money supply compared to nominal GDP raises questions about the accuracy of growth estimates. Additionally, personal consumption spending has outpaced the sales volumes of consumer goods companies, indicating a disconnect between reported consumption and actual market activity.

Private Investments

While public capital expenditure has surged, private investment appears to be contracting, implying that government spending has not translated into the anticipated economic boost. Household incomes remain under pressure, retail lending growth is sluggish, and reductions in government subsidies further dampen demand. Net indirect taxes have also climbed to their highest levels since mid-2018, adding to the strain on consumer spending.

The report also points to a shrinking trade volume despite a narrower external deficit, suggesting weakening domestic and global demand. “Despite a reduced external deficit, contraction in total trade indicates slowing global and domestic demand, highlighting a disconnect between reported GDP figures and the on-ground economic situation,” it notes.

Stronger Rural Consumption

Looking forward, hopes for economic revival hinge on stronger rural consumption driven by agriculture. However, ongoing weak private investment and uncertain global conditions could slow the recovery. The Reserve Bank of India may ease monetary policy if inflation remains subdued, but the report emphasizes that low inflation is largely a result of weak demand and incomes. It warns, “This bidirectional causality can be broken only with a turnaround in productive employment, which has been lacking in the wake of rising ruralisation and private capex.”

Global risks, including potential US tariffs under a Trump administration, could trigger stagflation in the US, posing additional challenges for India’s economy, especially as its trade-to-GDP ratio declines.