A front-loading of the investments by the government was the key driver of the higher-than-expected economic growth in the April-June quarter and its impact was amplified due to the low base of the last financial year, analysts said. They also noted signs of a strengthening of overall investment demand.
Public spending fuels investment and growth
The April-June quarter of the last financial year was taken up by the general elections. As the Model Code of Conduct was in force no new projects could be taken up. Moreover, with much of the government staff and officials involved in the election exercise, the routine clearances took a lot more time. Because of the low base of last year the capital expenditure at the central government level saw an increase of 52% on year to Rs 2.75 lakh crore in April-June.
“From the demand side, the investment demand remained the key driving factor. The capex by the Union and 25 state governments increased 33.3% y-o-y during April-June, highest since October-December quarter of last financial year, due to a low base effect. In April-June last year the government capital expenditure had contracted 31.1% year-on-year,” associate director at India Ratings Paras Jasrai said.
Front-loaded government expenditure boosted investment growth to 7.8% compared to 6.7% a year ago, senior economist at DBS Bank Radhika Rao said. Public administration including defence and other services on the supply side also jumped 9.8% from 9% same time last year, she added.
Private consumption and investment on the rise
In addition, there was also some momentum in the private sector as indicated by a robust capital goods output growth of 9.8% April-June which was the highest since January-March quarter of 2022-23. “It is vital that the general government maintains the capex momentum and front-loads their capex plans (like in FY24) in view of the unprecedented volatility and uncertainty in the global economic environment. This will provide the much-needed support to the weak investment profile,” Jasrai said.
In fact, net inflows of external commercial borrowings (ECBs) grew 159% to $4.4 billion dollar in the first two months of the current financial year as compared with $ 1.7 billion during the same period last year. However, new registrations contracted 31% to $5.7 billion from $8.3 billion during the same period, data from RBI’s July bulletin show. Also, bank credit to corporates remains weak − 5.5% on-year until June 2025 vs 7.7% until June 2024.
During the first quarter of this financial year the data showed that the consumption demand also is getting broad-based. The private consumption growth improved to 7.0% yoy during April-June from a five-quarter low of 6.0% yoy in January-March quarter of the last financial year.
The rural areas continued to outpace the urban areas in volume growth for six consecutive quarters. However, the gap in volume growth is narrowing. In addition, the sharp jump in imports also points to pick up in spending done by the upper end income strata. This was facilitated by a significant pick up in real wage growth of the formal sector (private non-financial corporates), which stood at an eight-quarter high of 7.4% y-o-y in April-June.
Even the rural real wage growth (for agriculture) remained positive for the fourth straight quarter April-June. In fact, it averaged 5.7% y-o-y (April-May 2025 as per the latest data) at a new high since when the data is available.