​Growth chill: On the economy

The National Statistics Office (NSO) has confirmed emerging fears about the economy’s evidently sluggish trajectory through this year in its first Gross Domestic Product (GDP) estimates for 2024-25. While the election-focused first quarter hit public capital spending, the second quarter (Q2) was marred by weak demand and still underwhelming public capex, dragging GDP growth to a seven-quarter low of 5.4%. The Centre and the Reserve Bank of India (RBI), which were projecting that India would log a fourth year of 7%-plus growth, had pared their hopes to ‘about 6.5%’ and 6.6%, respectively. This was predicated on a bump-up of about 7% in the second half of the year to offset the first half’s 6% rise. The NSO, slightly less sanguine, expects GDP to grow at a four-year low pace of 6.4%, from 8.2% in 2023-24, with just agriculture seen rising significantly faster than last year. Manufacturing and mining growth may virtually halve, and though services sectors seem relatively better off, there is some concern of momentum loss. Purchasing Managers’ Indices averaged lower than Q2 through Q3, for both manufacturing and services. The NSO expects private consumption to rebound 7.3% this year from just 4% last year. But Q3 trends do not indicate a significant lift-off in urban demand. So, this could be a tad optimistic despite inflation easing slightly since October.

The Finance Ministry has sought to link the demand slowdown to a “combination of monetary policy stance and macroprudential measures by the central bank”. Slow wage growth has also been blamed for cramped household demand. The NSO’s projection of gross fixed capital formation growth slipping to 6.4% this year from 9% in 2023-24 indicates that private capex — that is contingent on domestic and global demand — remains weak while public capex goals are unlikely to be met. Of course, these early NSO projections are largely conjured up for informing the Union Budget formulation, and some upgrades may happen later, but most economists see significant downside risks for now. Nomura economists, for instance, who have been arguing that India is in the grip of a cyclical slowdown for a while, reckon growth will end up around 6%, implying a flat-lined second half. With the global outlook also shrouded in uncertainty, winter seems to be here for India’s economy. How far behind spring lags will depend on policymakers’ actions, and inactions. The Union Budget 2025-26 needs to move from incremental tinkering to tailoring reforms and fiscal actions that can bring India’s growth back to the 7% mark, if not 8%, at the earliest. If that entails some hard calls such as slashing income, fuel and consumption taxes, along with import tariffs, so be it. Just pining for interest rate cuts will not suffice anymore.