A wake-up call: On the growth forecast

Even the most pessimistic economic forecasters did not anticipate the sharp downturn in economic momentum reflected in the Gross Domestic Product (GDP) estimates for the July-September quarter. From a five-quarter low of 6.7% in the first quarter (Q1), most independent economists expected GDP growth of 6.5% in Q2, citing slackening urban demand indicators such as moderating GST revenue growth, and weak consumer durables’ and non-durables’ sales. The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), in its October review, pegged Q2 growth at 7%, while RBI officials projected a 6.8% uptick in an article soon after. That the actual number came in at just 5.4% — the slowest since the third quarter of 2022-23 — with the Gross Value-Added (GVA) in the economy rising at a marginally better 5.6%, is, therefore, a significant shock. From a robust 8.2% GDP uptick last year, expectations of another year of 7%-plus growth in 2024-25 now appear precariously poised if not overtly optimistic, with the first half clocking just 6% growth.

The RBI’s MPC, which meets again this week, would certainly have to reorient its 7.2% growth forecast for the year, and may find it tougher to keep its focus on reining in inflation amid recent calls from Ministers to cut interest rates to support flailing growth impulses and investments. With inflation at a 15-month high of 6.2% in October, the RBI, which is committed to wait for a durable decline in price rise before switching gears on rates, is unlikely to accede to these calls just yet. It may, at best, unveil measures to ease tight liquidity conditions. Mint Street czars have a tough tightrope walk ahead in the face of the growth slump. North Block officials have, however, sought to downplay the recent streak of weaker economic indicators, and termed the Q2 growth print a ‘one-off’ number due to an urban demand slack that should dissipate in the months ahead. While rural demand is expected to perk up the economy in the second half of the year, along with a relative ramp-up in public capex that has suffered so far this year — thanks to a Q1 pause due to the general election and tepid Q2 spends amid an extended monsoon — it may be too complacent to assume that urban consumption will rebound on its own and interest rates are the only constraint for growth. Poor wage increases and persistent price rise have caught up on urban wallets, and cannot be wished away. The Centre must shed its ‘all is well’ approach, and ring in fiscal measures, including cuts on fuel taxes and high GST rates on some items, to ease living costs and revive demand.