India's GDP Growth: A Mirage of Strength Amid Weak Foundations

Systematix Research reports that India's GDP growth in early 2024-25 is misleadingly robust, driven by government spending rather than private investment or manufacturing. Slow money supply growth and weaker consumer sector indicators suggest a fragile economic state, with hopes pinned on rural consumption revival and policy easing by the RBI.

India's economy exhibited seemingly strong GDP growth during the January-March quarter of 2024-25; however, a new report by Systematix Research unveils underlying vulnerabilities. The report highlights that this growth is predominantly fueled by government expenditures, notably in construction, while the manufacturing sector continues to languish.

The report points out that though the 4QFY25 GDP figures appear robust, they fail to capture the economy's true condition, given its heavy reliance on public spending and visible mismatches. For instance, the slower pace of money supply growth compared to nominal GDP casts doubt on the accuracy of the growth statistics. Additionally, a disparity is noted as personal consumption spending outpaces consumer companies' sales volume, indicating possible overestimation.

Further concerns arise from weak household income, sluggish retail lending, and lower government subsidies suppressing demand, alongside a rise in net indirect taxes, the highest since June 2018. Systematix Research underscores these issues, asserting a disconnect between headline GDP growth and genuine economic activity, exacerbated by reduced trade figures signaling tepid domestic and global demand. Future recovery hinges on rural consumption and RBI policy adjustments, especially if inflation remains subdued due to suppressed demand.

(With inputs from agencies.)