India’s economic growth is set for a rebound in Q3 FY2025, with GDP expected to rise to 6.4% from the seven-quarter low of 5.4% recorded in Q2 FY2025, according to ICRA. This recovery signals an improvement in economic momentum; however, it may still fall short of the National Statistical Office’s (NSO) initial estimates for Q1 FY2025. While both GDP and Gross Value Added (GVA) are projected to expand at a faster pace compared to the previous quarter, the overall performance remains tempered by lingering challenges in certain sectors.
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India’s economic performance in the third quarter of FY2025 is poised for a notable rebound, driven by enhanced government spending and improvements across key sectors. According to ICRA, the GDP growth rate is expected to rise to 6.4% in Q3 FY2025 from the seven-quarter low of 5.4% recorded in Q2 FY2025. Similarly, the growth in Gross Value Added (GVA) is projected to improve to 6.6% from 5.6% in the previous quarter. This upward trajectory is attributed to a broad-based recovery across the industrial, services, and agricultural sectors.
Sectoral Growth Trends
ICRA’s analysis highlights a significant turnaround in industrial growth, which is estimated to rise to 6.2% in Q3 from 3.6% in Q2. Within this sector, manufacturing is projected to grow at 5.0% (up from 2.2%), construction at 9.5% (up from 7.7%), electricity at 5.0% (up from 3.3%), and mining and quarrying at 2.5% (recovering from a contraction of -0.1% in Q2). The easing of rainfall-related disruptions played a key role in the revival of mining and electricity production.
The services sector is also expected to see a rise in growth, from 7.1% in Q2 to 7.7% in Q3. This increase is supported by a surge in services exports, which expanded by 17.5% YoY in Q3, reaching a record US$ 36.9 billion in December 2024. Additionally, merchandise exports rebounded, growing by 3.3% in Q3 compared to a contraction of 4.3% in the previous quarter.
In the agricultural sector, GVA growth is estimated to increase to 4.0% , the highest in seven quarters, up from 3.5% in Q2. The healthy increase in kharif food grain output and a favorable base effect contributed to this improvement.
Government Spending: A Key Growth Driver
One of the most significant factors driving GDP growth in Q3 FY2025 is the sharp increase in government spending. Aggregate capital and revenue expenditure by the Centre and states surged, boosting investment activity. The Government of India’s capital expenditure (capex) recorded a six-quarter high growth of 47.7% in Q3, compared to 10.3% in Q2. This rise in public investment had a cascading effect on various investment-related indicators, including capital goods output, cement production, and engineering goods exports.
However, the growth in net indirect taxes, in nominal terms, is estimated to ease significantly to low single digits in Q3, down from 7.9% in Q2. This decline is attributed to a sharp year-on-year increase in subsidy disbursements, which rose by 31.1% in Q3, compared to 4.3% in Q2. Consequently, GDP growth is projected to lag behind GVA growth for the third consecutive quarter, a trend expected to persist for the full year.
Economic Performance Relative to Projections
Despite the recovery, India’s GDP and GVA growth in Q3 FY2025 are expected to remain below the National Statistical Office’s (NSO) initial estimates for Q1 FY2025, which stood at 6.7% and 6.8% , respectively. The earlier quarter was impacted by factors such as the Parliamentary elections, the Model Code of Conduct, and adverse weather conditions, including heatwaves in several states.
In contrast, the Reserve Bank of India (RBI) had projected India’s real GDP growth for Q3 FY2025 at 6.8% and Q4 at 7.2% . If ICRA’s estimates hold, the actual GDP growth may fall short of RBI’s projections.
Consumer Sentiment and Demand Dynamics
While the overall economic outlook is improving, consumer demand remains uneven. Some consumer-focused sectors saw a boost during the festive season, but urban consumer sentiment experienced a slight dip. However, increased government spending, a turnaround in merchandise exports, and a rise in kharif crop output are likely to support rural demand, partially offsetting the weaker urban consumption trends.
India’s economic growth trajectory in Q3 FY2025 signals a recovery, driven primarily by a sharp increase in government expenditure and improvements in industrial and agricultural output. While the GDP growth rate is expected to rise compared to the previous quarter, it may still lag behind initial projections. Factors such as service sector expansion, infrastructure investments, and a turnaround in exports contribute to the positive outlook. However, the uneven consumption pattern and continued lag in GDP growth relative to GVA highlight areas of concern. Looking ahead, sustained policy support and strategic investment initiatives will be crucial in maintaining economic momentum in the upcoming quarters.
