India’s Q3 GDP picks up pace: What the latest data reveals

After a sudden slump in the second quarter of the financial year, India's economy has bounced back in the third quarter of October to December. The Gross Domestic Product (GDP) grew by 6.2% in October-December. It saw a sharp slowdown in the July to September quarter, with GDP growth slipping to 5.6%, the slowest pace in seven quarters. Economists blamed the slowdown on weak urban demand and a delay in government spending due to national elections last year. Yet, the Q3 GDP growth is marginally below expectations. The Reserve Bank of India (RBI) had projected GDP growth of 6.8% while an ET Poll and a Reuters survey had both suggested growth rate of 6.3% in the third quarter. The Q3 GDP growth is also lower than the 8.6% in the same quarter last financial year. India still remains the fastest-growing major economy in the world.

In its latest monetary policy, the RBI had cut India's growth forecast for 2024-25 to 6.6 per cent from 7.2 per cent. The government now estimates the GDP to grow by 6.5% in 2024-25. India's economy must accelerate to 7.6% in the fourth quarter to reach a full-year growth target of 6.5%, said Chief Economic Advisor V. Anantha Nageswaran on Friday.

The Q3 GDP growth drivers

The third quarter data showed broad-based growth driven by both domestic demand and exports, signaling a robust economic recovery. Industrial activity gained momentum, and the services sector remained resilient, with urban demand improving significantly, said the CEA. Notably, FMCG sales volume growth almost doubled to 5% in Q3 from the previous quarter, reflecting stronger consumer sentiment. Additionally, rural demand, which has shown resilience, will continue to support overall growth.

Government spending rose 8.3% in the last three months of 2024 from a modest 3.8% increase in the previous three months. Private consumer spending jumped 6.9% year-on-year, up from 5.9% in the previous quarter, buoyed by improved rural demand due to moderating food prices and more spending on purchases for the festival season than a year earlier.

Agricultural output rose 5.6% year-on-year from a revised 4.1% in the previous quarter, but growth in manufacturing, which contributes about 17% of the economy, remained subdued at 3.5% against 2.2% in the previous quarter.

Nageswaran further highlighted that exports, particularly core merchandise and services, provided a solid performance on the external sector front, further underpinning India’s economic outlook. FDI inflows remain steady, while FPI shows volatility. Private investment intentions are picking up pace and private sector needs to ramp up investments, Nageswaran said. There is no uncertainty about Indian demand, and the income-tax cut announced in the Budget will help consumption.

Infrastructure output grew 4.6% year-on-year in January, backed by a pick up in cement and refined petroleum product output. Infrastructure output, which tracks activity across eight sectors and makes up 40% of the country's industrial production, grew at a revised 4.8% in December, compared to the initial estimate of 4%. Infrastructure output rose 4.4% in April-January, compared to a 7.8% increase in the year-ago period.

Is the worst behind for Indian economy?
The Q3 GDP data indicates the worst could be behind for India's economy even as there is a lot of uncertainty on global challenges related to tariffs. "We think the worst is over as far as India's growth trajectory is concerned but, even with the improvement of momentum, overall GDP growth is likely to remain below the potential growth rate of 7% in 2025-26," Deutsche Bank said in a recent note, which forecast growth for the next financial year at 6.5%.

India will continue to retain its tag of the fastest growing major economy, but faces uncertainties over its trade with US and the Donald Trump administration's plans to impose reciprocal tariffs. "The near-term impact of tariffs on growth might be small, with asymmetric sectoral implications," Radhika Rao, an economist at DBS Bank wrote in a February 25 note.

Harry Chambers, Assistant Economist, Capital Economics, London, said, "Stepping back, the big picture is that the economy is still fairly soft by India's recent standards. However, with the Reserve Bank of India shifting its priorities from controlling inflation to supporting growth, economic activity should begin to pick up further. This week's reversal of the tighter bank lending restrictions introduced in late 2023, as well as the further monetary policy loosening from the central bank that we expect, will boost household consumption and investment in particular."

"The Q3 GDP growth is marginally better than our expectations. The pickup in growth moment reflects some improvement in listed companies profit growth with moderation in input cost. Agriculture growth also showed a strong pickup led by robust Kharif crop output. Meanwhile, on the demand side, private consumption growth picked-up reflecting revival in rural demand," said Gaura Sen Gupta, India Economist, IDFC First Bank.

The challenging time which persisted due to the contraction of the economic growth seems to be over, as per a recent report by BNP Paribas. The report highlighted focus of Union Budget FY25-26 on stimulating consumption. It adds that the government's decision to increase the income threshold and relax tax slabs for those under the new tax regime is set to boost disposable incomes, particularly for high-income households. Around 30 million salaried individuals are expected to benefit from this tax bonanza, with the maximum relief amounting to Rs 110,000 per annum (USD 1,300). According to the report, this tax relief is expected to support discretionary consumption across various sectors, including durables, automobiles, asset management, healthcare, travel, and jewelry--sectors poised to benefit from the growing affluent middle class in India. The increased disposable income should also improve retail asset quality, particularly in unsecured loans, the report added.

Possible tariffs by the US on India's exports remain a threat to the GDP growth. India’s exports to the US could decline by $2 billion to $7 billion in FY26 if the proposed reciprocal tariffs by the US government are implemented, according to India Ratings and Research (Ind-Ra). Between April and December of this fiscal year, India’s exports to the US rose by 5.57% to $59.93 billion, while imports grew by 1.91% to $33.4 billion.

The US has been India’s largest trading partner since 2021-22, accounting for about 18% of total exports, over 6% of imports, and around 11% of bilateral trade. Ind-Ra estimates that if these tariffs take effect, a more likely scenario would be a decline of $2 billion to $3.5 billion in Indian exports to the US, which could reduce GDP growth by 5-10 basis points from the current projection of 6.6%. “The weighted average tariff differential is around 7 percentage points, and a more plausible scenario is a decline in exports by $2 billion-$3.5 billion,” said Devendra Kumar Pant, Chief Economist and Head of Public Finance at Ind-Ra.

Discussions between the two governments over the next four to six weeks are expected to provide clarity on the situation. Ind-Ra also noted that ongoing bilateral trade talks, as well as defense and energy agreements between India and the US, could help mitigate the impact of potential tariffs on Indian exports.

India’s economy needs to expand at an average growth rate of 7.8 per cent over the coming decades to become a high-income country, as per a recent World Bank rpeort. The world’s most populous nation is currently on track to become an upper middle-income country by 2032, but it will need two more decades of “very high growth” to reach its target of becoming an advanced economy by 2047 — its 100th anniversary of independence from Britain — World Bank said. Only a handful of countries have managed to make the transition from middle to high income in less than two decades.

(With inputs from agencies)