MUMBAI: The economy is likely to have clipped at 6.7% in the June quarter — flat on a year-on-year basis, but well below the 7.4% growth printed in Q4 FY25, buoyed by front-loaded capex by the government along with higher exports to the US ahead of the higher tariffs which are effective from this month, says a report.
According to Icra Ratings, its forecast outpaces the RBI Monetary Policy Committee’s forecast of 6.5% earlier this month. The economy had clipped at 6.7% in the June 2024 quarter. The rating agency sees gross value added (GVA) growth falling to 6.4% in Q1 from 6.8% in Q4.
Lower expansion in the industrial sector (to 4% from 6.5% in Q4), and agriculture (to 4.5% from 5.4%), is likely to outweigh a pick-up in the services sector (to an eight-quarter high of 8.3% from 7.3%), it said.
Another reason for better numbers is a likely double-digit growth in net indirect taxes in nominal terms, albeit lower than 22.7% in Q4. This is aided by the sharp uptick in the Centre’s indirect taxes (to 11.3% from -3.1% in Q4), despite the narrower contraction in its subsidy outgo (-7.3% vs -40.7%).
Accordingly, the gap between GDP and GVA growth is expected to remain in positive territory at 30 bps in Q1 FY26, while halving compared to the previous quarter’s +62 bps.
“Investment activity held up in Q1, boosted by the front-loading of government capex, although this admittedly came on a low base, amidst heightened uncertainty owing to geopolitical tensions and tariff-related developments. Benefitting from robust government capex as well as revenue spending, upfronted exports to some geographies and nascent signals of improved consumption, the pace of expansion in economic activity is estimated at 6.7%,” Aditi Nayar, the chief economist at Icra, said in a note Tuesday.
Nevertheless, GDP and GVA growth is likely to moderate from the levels recorded in Q4, even as the wedge between the two is set to narrow considerably relative to the previous quarter (to 30 bps from 62 bps),” Nayar added.
But she warned of slowing growth due to “the continuing tariff-induced uncertainty for exports and private capex. We fear that growth will taper off in the subsequent quarters, which would limit GDP expansion to 6% in FY26.”
Government capex rose 52% to Rs 2.8 trillion in Q1 (33.4% in Q4 FY25; -35% in Q1 FY25). Moreover, the aggregate capital outlay and net lending of 24 states stood at 23% at Rs 1.1 trillion (down from 27% in Q4 and -19.6% in Q1 FY25).
Further, the value of new project announcements nearly doubled to Rs 5.8 trillion from Rs 3 trillion year-on-year. Additionally, project completions touched a healthy Rs 2.3 trillion from Rs 0.7 trillion, only slightly lower than Rs 2.5 trillion in Q4.
She estimates the annualised growth in services GVA to increase to an eight-quarter high of 8.3% from 7.3%, supporting overall GVA expansion.
The combined non-interest revenue expenditure of these 24 states reported a double-digit growth of 10.7% from 7.2%. Likewise, the Centre’s non-interest revenue expenditure saw a turnaround, recording a growth of 6.9% against a contraction of 6.1%.
Industrial GVA growth is expected to decline to 4% from 6.5%, with excess rainfall weighing on the performance of the mining (to -2.0% from 2.5%) and electricity (to 0.0% from 5.4%) sectors, amid a strong base effect.