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The Indian economy witnessed a robust 7.4% GDP growth in the fourth quarter of FY25, primarily fueled by investment, as private consumption moderated and government consumption expenditure contracted. This performance highlights the crucial role of investment in driving economic expansion, but also raises concerns about the sustainability of this growth trajectory in the face of global uncertainties and moderating consumer demand. The robust growth in gross fixed capital formation (GFCF), which reached a six-quarter high of 9.4% in Q4FY25, suggests a concerted effort by both union and state governments to meet their capital expenditure targets, coupled with a significant push from the private sector. This surge in investment demand provided a much-needed boost to the economy during the period. However, the sustainability of this investment-led growth is a subject of concern, particularly given the prevailing economic uncertainties and the cautious stance adopted by the private sector in the wake of global headwinds. The global economic landscape is fraught with challenges, including geopolitical tensions, inflationary pressures, and potential disruptions to supply chains. These factors can significantly impact investor sentiment and deter private sector investment decisions. Moreover, the weak foreign investment demand, as indicated by the net foreign direct investment (FDI) inflow, further compounds the concerns about the long-term sustainability of investment demand. A decline in FDI inflows can constrain the availability of capital for investment projects and hinder economic growth. Therefore, it is imperative to closely monitor the trend in investment demand and take proactive measures to ensure its sustainability. According to Paras Jasrai, Associate Director at India Ratings, the pickup in investment demand is significant but needs to be watched out for a sustainable trend in view of the economic uncertainty and the weak foreign investment demand. This observation underscores the importance of maintaining a vigilant approach and implementing policies that foster a favorable investment climate. The Centre's capital expenditure grew by 10.8% to Rs 10.5 lakh crore in FY25, compared with the revised estimate of Rs 10.18 lakh crore for the year. This increase in government spending on infrastructure projects and other developmental initiatives played a crucial role in stimulating economic activity and boosting investment demand. However, it is essential to ensure that the government's capital expenditure growth momentum is sustained in the coming quarters to support overall economic growth. As D K Srivastava, Chief Policy Advisor at EY India, points out, at this juncture, the Union government’s capital expenditure growth momentum needs to be restored and supplemented by a continuation of the repo rate reduction cycle so that monetary and fiscal policy support can ensure that India’s real GDP growth does not slip below 6.5% in FY26. This highlights the need for a coordinated approach involving both fiscal and monetary policy measures to maintain the growth momentum and mitigate the risks associated with economic uncertainties. A reduction in the repo rate can lower borrowing costs for businesses and consumers, thereby stimulating investment and consumption demand. On the other hand, private consumption growth moderated to a five-quarter low of 6% on year in Q4FY25. This slowdown in private consumption growth is a cause for concern, as it indicates a weakening of domestic demand. The moderation in private consumption growth appears to be due to the slowing trend at the upper end of the income ladder, as suggested by Jasrai. This observation suggests that the higher-income groups are becoming more cautious in their spending habits, possibly due to concerns about the economic outlook or changes in their financial circumstances. The FMCG sales volume moderated in Q4FY25, with the urban areas showing a tepid growth of 2.6% on year, which was less than a third of that of the rural areas. This divergence in consumption patterns between urban and rural areas suggests that the slowdown in private consumption growth is more pronounced in urban areas. In addition, the sharp decline in imports also points to slow spending done by the upper end income strata. This further reinforces the notion that the higher-income groups are curtailing their spending. However, even though private consumption remains soft, various tailwinds in form of lower inflation, lower interest rate and tax cuts will keep the outlook upbeat, according to Rajni Thakur, Chief Economist at L&T Finance. This optimistic outlook is based on the expectation that these factors will help to stimulate consumption demand and support economic growth. The rural real wage growth for agriculture remained positive for the third straight quarter in Q4FY25. It averaged 3.7% on year in January-February 2025 as per the latest data, which was the fastest pace of growth since Q2FY20, according to Jasrai. This positive trend in rural real wage growth is encouraging, as it indicates an improvement in the purchasing power of rural households. This, in turn, can help to boost rural consumption demand and support overall economic growth. The government consumption expenditure declined 1.8% on year in Q4FY25, the sharpest since Q1FY22 due to the base effect (Q4FY24 was 6.6%) and fiscal consolidation. This decline in government consumption expenditure reflects the government's efforts to consolidate its fiscal position and reduce its overall spending. Despite an increase in capex, the Centre’s spending came in at Rs 46.55 lakh crore, 1.3% lower than the revised estimate of Rs 47.16 lakh crore for the year. This indicates that the government is prioritizing capital expenditure over consumption expenditure, which is a positive sign for long-term economic growth. In conclusion, while investment has been a key driver of GDP growth in Q4FY25, the sustainability of this growth trajectory is a subject of concern. The moderation in private consumption growth and the uncertainties in the global economic landscape highlight the need for proactive policy measures to support domestic demand and foster a favorable investment climate. The government needs to maintain its capital expenditure growth momentum and complement it with monetary policy support to ensure that India’s real GDP growth does not slip below 6.5% in FY26.