India's GDP Surges to Four-Quarter High of 7.4% in Q4FY25, Full-Year Growth at 6.5%
India's economic performance reached impressive heights in the final quarter of FY25, with GDP growth accelerating to 7.4%, marking the highest quarterly growth rate in four quarters. The robust performance helped push the full-year GDP growth to 6.5%, exceeding market expectations and demonstrating the resilience of Asia's third-largest economy.
Beating Market Expectations
The latest GDP figures released on May 30, 2025, significantly outperformed analyst predictions. The quarterly growth of 7.4% surpassed the median forecast of 6.9%, while the annual growth rate of 6.5% exceeded the expected 6.3% according to earlier market polls.
Chief Economic Advisor V Anantha Nageswaran highlighted India's standout performance, noting that "at real GDP growth of 6.5% for FY25, India outshines in view of other economies still recovering from Covid." This achievement positions India among the fastest-growing major economies globally.
Investment Demand Drives Growth
The stellar Q4 performance was primarily driven by robust investment demand, with capital formation surging to 9.4%, reaching a six-quarter high. This represented a significant improvement from 6% in Q4FY24 and 5.2% in the previous quarter.
According to Madhavi Arora, Chief Economist at Emkay Global, "The Q4 growth print partly reflects the back-loaded spending effect of the government, both centre and states, led more by public capex spending." The strategic timing of government expenditure, particularly in infrastructure projects, provided crucial momentum to economic activity.
The share of gross fixed capital formation increased to 33.9% from 33.3% in the corresponding quarter of the previous year, indicating sustained investment activity across the economy.
Sectoral Performance Analysis
The fourth quarter witnessed strong performance across key sectors, with agriculture and construction leading the charge while manufacturing showed mixed results.
Agriculture Sector Rebounds Strongly
Agriculture emerged as a major growth driver, with the sector expanding by 5.4% compared to just 0.9% in the same quarter last year. On an annual basis, agriculture growth reached a five-year high, reflecting improved rural economic conditions and favorable weather patterns.
Construction Maintains Momentum
The construction sector continued its robust performance, growing by 10.8% in Q4FY25, up from 7.9% in the previous quarter and 8.7% in Q4FY24. This strong showing reflects ongoing infrastructure development and increased private sector participation in construction activities.
Manufacturing Shows Mixed Signals
While manufacturing improved from the previous quarter to 4.8%, it remained significantly below the 11.2% growth recorded in Q4FY24. This moderation suggests ongoing challenges in industrial production, despite gradual recovery trends.
Services Sector Stability
The services sector maintained steady performance with 7.3% growth, marginally down from 7.4% in Q3FY25 and 7.8% in Q4FY24. This consistency demonstrates the sector's resilience and continued contribution to overall economic growth.
Tax Revenue Boost Supports GDP
A significant factor contributing to the strong GDP performance was the substantial increase in tax collections. Net taxes expanded by 12.7% in real terms and 22.7% in nominal terms year-on-year, compared to much lower growth rates of 5% and 6.5% respectively in the third quarter.
The improved tax performance, combined with lower subsidy expenditure, created a favorable fiscal environment that supported overall economic growth. However, this also led to a wider gap between Gross Value Added (GVA) and GDP figures.
GVA-GDP Gap Widens
While GDP growth impressed at 7.4%, the Gross Value Added (GVA) growth was more modest at 6.8%, up from 6.5% in the previous quarter. As noted by Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, "The high net indirect tax growth has led to the wide gap between the two."
This gap reached its highest level in four quarters, indicating that while economic activity (measured by GVA) remained steady, the government's tax collection efficiency significantly improved during the period.
Private Sector Participation
Experts suggest that private sector investment also contributed to the strong capital formation numbers. According to Paras Jasrai, Associate Director at EY, "The seasonal rush to meet their capex targets by both union and state governments along with the private sector provided succour to the investment demand in Q4FY25."
Recent NSO survey data indicates increased capital expenditure intentions from private companies, suggesting that business confidence is gradually improving and translating into actual investment commitments.
Economic Outlook for FY26
Looking ahead, economists maintain a cautiously optimistic outlook for India's economic trajectory. Despite global uncertainties, India's economy is expected to grow 6.3% in FY26 according to market consensus, with inflation projected to settle at a comfortable 3.7%.
The strong foundation built through robust capital formation, steady services growth, and improved agricultural performance positions India well for sustained economic expansion. However, the manufacturing sector's performance will be crucial to watch, as industrial recovery remains essential for broader economic momentum.
The government's continued focus on infrastructure spending, combined with improving private sector confidence, suggests that India's growth story is likely to continue despite challenging global economic conditions.
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