Construction and government spending drive quarter
India's economy demonstrated significant momentum in the January-March quarter of fiscal year 2025, expanding by a robust 7.4%. This performance exceeded the Reserve Bank of India's (RBI) forecast of 7.2%, according to data released by the National Statistics Office in May.
The quarterly acceleration was primarily fueled by a booming construction sector, which grew by an impressive 10.8%. This surge was supported by sustained infrastructure development and strong real estate demand. Government spending also played a crucial role, particularly in public administration and defense, contributing an 8.7% increase. Financial and professional services saw a healthy rise of 7.8%.
Further bolstering the quarterly figures was a notable 12.7% jump in net indirect taxes, which the State Bank of India identified as a key factor in the overall economic expansion. However, the manufacturing sector remained a weak spot, showing subdued growth of 4.8%, continuing a trend of softness observed throughout the year.
Annual slowdown reflects global headwinds
Despite the strong fourth-quarter performance, India's full-year economic growth for fiscal year 2025 settled at 6.5%. This marks a significant deceleration from the 8.2% recorded in the previous fiscal year, making it the slowest expansion since the pandemic. The annual slowdown underscores the impact of elevated global uncertainties and fluctuating domestic consumption patterns.
Private consumption, a key indicator of demand, improved to 7.2% for the full year, up from 5.6% previously. However, this recovery was uneven across different regions. While rural demand showed signs of improvement, driven by strong agricultural output, urban spending patterns indicated continued caution among consumers.
Mixed outlook for current year
Looking ahead, the Reserve Bank of India maintains its growth projection of 6.5% for the current fiscal year 2026, describing the outlook as "evenly balanced" despite global headwinds. Conversely, rating agency ICRA has adopted a more conservative stance, forecasting a 6.2% growth rate and noting that "downside risks have risen."
Recent high-frequency indicators for May suggest continued resilience across India's industrial and services sectors, as highlighted in the RBI's June bulletin. The central bank continues to emphasize India's position as the fastest-growing major economy, even amidst ongoing trade uncertainties and geopolitical tensions. As Manoranjan Sharma, chief economist at Infomerics Valuations and Ratings, stated, "India's economic trajectory remains resilient despite global headwinds and regional geopolitical tensions," though he cautioned that external uncertainties continue to pose challenges.
