Q2 GDP slowdown could be partly a result of low government spending in 2024 as it was a long election year. This could reverse with higher public expenditure. Moreover, the monetary policy is also expected to take a fresh route now with the new Governor at the helm in the Reserve Bank of India (RBI). Together, the fiscal and monetary policy tweaks could be a gamechanger.
Beyond the overall enthusiasm and optimism reflecting unprecedented growth and prosperity from outside, the government data showed India’s Q2 gross domestic product (GDP) growth slipping to a seven-quarter low of 5.4 per cent. This was a shocker and following the announcement the commentary on the local economy is not very encouraging in the medium terms though the long-term prospects remain intact.
In the July-September quarter of FY24, it stood at 8.1 per cent which is 270 bps higher than this time.
The first advance estimate of India’s GDP for the financial year 2024-25 shows a decline in the real GDP growth rate to 6.4 per cent from 8.2 per cent registered in FY 2023-24. The data was released by the National Statistics Office (NSO).
The economic survey ahead of the July 2024 budged had pegged the GDP growth in the range of 6.5 per cent to 7 per cent. Moreover, the nominal GDP growth rate was estimated at 9.7 per cent for 2024-25. This is significantly lower than the 10.5 per cent growth rate projected in the last Union Budget.
The nominal GDP is the sum of the real GDP growth rate and the overall inflation rate.
The views on FY26 prospects remain mixed with a section remaining bullish about the future while the others see fundamental trouble areas with growing income disparity, employment-related problems and climate changes. The newspapers, online publications and television media are splattered with headlines arguing for or against the situation.
One of the reasons for this slowdown can be attributed to low government spending over first 6-7 month of FY25 because 2024 was an election year with general elections and four assembly elections. The government had earmarked a budget of Rs 11.1 lakh crore for FY25 and it may most likely fall at least 15 per cent short of utilising the funds.
What is more worrying is that the global growth is being seen to remain steady and if India does not mend its ways, it will be a loss of opportunity.
International Monetary Fund’s (IMF) Managing Director Kristalina Georgieva recently said that she sees the Indian economy “a little weaker” in 2025 despite steady global growth.
Ratings agency Moody’s has slashed India’s economic growth forecast to 7 per cent for FY25.
Budget 2025
This slower pace of growth and lower spending could be transitory and we may see that change in the second half of this current financial year and its impact could start showing in a couple of quarters.
Notwithstanding the slippages, India still remains the fastest growing major economy and ahead of US and China. With 1.4 billion people, it is also an important market for the world as nations and companies are focusing on India at a time when China’s economic woes remain as colossal as the country itself.
India is an aspirational nation with its markets remaining untapped and if its own consumption picks up, that could kick-start the economy.
There is a lot of expectation this time around. It expected that the government will stick to its fiscal discipline goal in the upcoming budget. It could revise the fiscal deficit target down to 4.5 per cent for FY26 as against 4.9 per cent target in FY25. This means that the spending could be more targeted and outcome-based.
The capital expenditure budget may go up by 10-15 per cent this time, with the focus remaining on infrastructure.
The middle class may be looking up for some relief in the form of liberal taxes, which could also put some discretionary saving in its pocket.
The government is mindful of the slowdown in urban consumption and could act to nip this issue in the bud. The good part is that the rural consumption is getting better.
Rupee Conundrum
Rupee has been a big a causality owing to the strengthening dollar. A weaker rupee could be good for export-focused sectors, but is problematic for the people as a falling currency loses its purchasing power. This is inflationary and mounts problems for the average citizens. Rupee has slipped below 86 against the US dollar and while there is a view that it should stop at 87, we do not know how things will pan out going ahead.
MAGA factor
The rise in the greenback against major currencies including Indian rupee became more prominent following Donald Trump’s return to the power. A disrupter and a proponent of ‘America First’ or ‘Make America Great Again’, he could be the biggest disrupter to the global order. While one could argue that being a businessman, he is practical and a great negotiator, his ability for knee-jerk reactions cannot be taken lightly.
There is a tariff threat lurking on the world, including India.
In his first week, he signed several executive orders, pulled out of the World Health Organisation (WHO) and the Paris climate pact, while abolishing limits and incentives to hydro carbon fuels.
India has been making big strides towards green energy and has set lofty targets for the next few decades. We have seen emergence of new players/start-ups while established players making a switch to green energy and reduction in carbon emissions. A lot of funds and the right global ecosystem would be required to take these initiatives forward. A back-and-forth on climate policies could be unsettling.
Challenges are many but our history has been resilient even in the face of global crises. India has a stable government which has long runway to bring things in order.
Public spending will remain vital and there is an overwhelming view that it is going to pick up soon; so the hope is of a much better growth in the coming quarters.
Moreover, the monetary policy is also expected to take a different route now with the new governor at the helm in the Reserve Bank of India (RBI). A monetary policy meeting in coming up in February and expectations are that we could see a 25-bps cut.
The idea has been endorsed by the government on many occasions in Shaktikanta Das’ tenure.
The time is ripe to make necessary changes and take it to the good old winning times.
