But what we need to ask is whether this recovery is enough to stop the sharp sell-off in stock markets. The following piece argues that there are quite a few positives in the Friday numbers that could overturn the negative sentiment of Foreign Portfolio Investors (FPIs) towards India’s growth story.
First, one needs to admit that Indian stocks have been seeing one of their sharpest sell-offs, primarily because India’s growth slowed—not only due to global headwinds, serious as they are. After four years of double-digit earnings growth, Nifty Earnings Per Share (EPS) rose by 5.5% in Q1 this year.
Investors held on to watch the subsequent quarters, and as earnings looked set to dip below 5% for the next quarter as well, the selling started. The Q2FY25 EPS growth of 4.4% was followed by dismal Q2 GDP growth data of 5.4%, and the selling accelerated.
While there is much to the argument that US exceptionalism has been the compelling trade since President Donald Trump was elected, market veterans also point out that in calendar 2025, Indian equities have seen $13 billion of outflows, even as Chinese equities have surged—indicating a clear sell-India, buy-China trade.
Chinese equities were attractive not merely because of their rock-bottom valuations of barely 10x but also because the government has lately been showing a willingness to stimulate the economy with tangible and intangible support. President Xi even had a totally unexpected meeting with private sector entrepreneurs, including the once-shunned Jack Ma.
In the past four months, Indian equity valuations have certainly dipped below their long-period average. But has growth returned? That is the question FPIs would be asking. The Q3 GDP numbers could give investors an incremental reason to believe that India’s growth slowdown is over and that the economy is in recovery mode.
Here are some positives from the data:
1. Firstly, in real terms (i.e., adjusted for inflation), India’s GDP is ₹3 lakh crore larger than estimated just a month ago—on January 7—when the first advance estimates of this year’s GDP were released. Not adjusted for inflation, the GDP is higher by ₹7 lakh crore versus the January estimate. The reason for this uptick is that the GDP growth of prior years has been revised sharply higher. The GDP growth for FY23 has been revised upward from 7% to 7.6%, and the GDP growth for last year, FY24, has been increased from 8.2% to 9.2%.
2. Coming to the latest quarter, the October–December quarter of 2024, growth has recovered from the shocking low of 5.4% in the second quarter to a respectable 6.2%. Actually, even the second quarter has been revised slightly higher to 5.6%. The key takeaway, however, is that Q2 was clearly an aberration and that the economy is recovering.
3. The composition of Q3 GDP is heartwarming: three of the big contributors—agriculture at 5.6%, construction at 7%, and trade, hotels, and transport at 6.7%—are all employment-heavy sectors. Logically, therefore, the acceleration in private consumption seen in the Q3 GDP numbers is likely to continue.
4. Two other sectors that have done well include finance & real estate, which grew by 7.2%, and public administration & defence, which grew by 8.8%. Both of these sectors have a big multiplier impact.
5. GDP measured from the expenditure side showed a healthy growth in private consumption at 6.9%, which is expected to rise to 7.6% for the full year, compared to just 5.6% last year.
To be sure, there are some red flags. Gross fixed capital formation has slowed to 5.7% in Q3. For the full year FY25, however, it is expected to be better at 6.1% but still lower than last year’s 8.8% capex growth. Another red flag is the unimpressive growth of manufacturing—at 3.5% in Q3 and forecast to grow by only 4.3% for the full year FY25.
However, the positives outweigh the negatives. The fact that the recovery in Q3 GDP has come from employment-heavy sectors like agriculture, construction, and trade, hotels, and transport should not be missed. This signals continued growth in consumption. Add to this the boost given to consumption by the one trillion rupee cut in income tax and the rate cuts and liquidity injections by the RBI, and the stage appears set for a continued recovery in private consumption.
Possibly, these measures gave the National Statistical Organisation the confidence to raise its full-year GDP forecast for the current year to 6.5%, up from 6.4% earlier. Considering that the average growth of the first three quarters is only 6.1%, the economy has to grow by 7.7% in the fourth quarter to deliver an average of 6.5% for the year.
The CEA defended the forecast, saying that the continued strong growth in services exports, the rise in the pace of government capex, and the bump to the economy from the Mahakumbh could lead to sharply higher growth in Q4, i.e., the current quarter. The CEA may be stretching the optimism. Central government capex in the October–December quarter was 50% higher than year-ago levels. Yet, gross fixed capital formation grew by only 5.7% in Q3.
The point is that the government forms a very small part of the country’s capital investments. And as the CEA was at pains to point out during his presentation, private capex has still not picked up. Even if the three factors stated by the CEA work well, the economy will perhaps manage growth close to 7% in Q4, taking the annual average to a shade less than 6.4%.
But a 7% Q4 growth could be a huge sentiment booster. Wouldn’t a long-term investor want to jump the gun and buy ahead of the Q4 data? The global uncertainties of tariff wars and shifting geopolitics have probably already been priced in. It will be interesting to see if foreign investors see the U-turn in GDP growth as a good excuse to return to Indian equities—even in small measures. For the moment, even a slowing of the pace of selling will help.
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