While India’s economic potential and its status as the fastest growing major global economy remain unchallenged, there is a worry over the pace of its growth after a 5.4 per cent GDP growth stunner in the July-September quarter. This was the slowest in the last seven quarters and much below the expectations.
Following this, there were a series of forecasts by the top domestic and global agencies, who trimmed their growth expectations on India. The International Monetary Fund (IMF), in its January 2025 update of World Economic Outlook, had projected country’s real GDP growth at 6.5 per cent for FY25, which is a 0.5 per cent points climbdown from its growth forecast in October 2024. Meanwhile, the Reserve Bank of India (RBI) also slashed FY25 real GDP growth estimates to 6.6 per cent in December 2024 versus 7.2 per cent in October 2024. A 60-bps revision is a significant decline.
One of the reasons behind Q2’s lower than anticipated growth was the decline in the government spending in the first six to seven months with 2024 being an election year. First, it was the general elections and later, state elections of Maharashtra, Haryana, Jammu & Kashmir and Jharkhand. Delhi elections are also over and from here the government spending is expected to improve.
The Q2 GDP fall outcome triggered two major actions — one from the government of India and the other from the central bank. From the government side, a tax relief to the middle class in the budget 2025 has been given and from the RBI’s side, a 25-bps interest rate cut. Both these actions are being seen as steps to boost the consumption and fire-up the economy.
In the case of tax exemption limit of up to Rs 12 lakh, the jury is still out on the likely impact it would have on consumption and hence the economy in the long term. One line of thought is that it would leave more income in the hands of the people which they could use not just to splurge on discretionary requirements but to also boost their savings.
Another line of thought is that there will be a limited impact of this move and for a short period because the beneficiaries could be just 2-3 crore tax payers (as people with income up to Rs 7 lakh were already exempted). However, a bigger criticism is that it would narrow the tax payer base significantly. This will be after years of hard work by the government to widen its tax net.
As of now, we still do not know how it would play out.
The RBI’s decision to cut interest rate by 25 bps, was a longstanding demand which came after 5 years. The cut came under the new Governor Sanjay Malhotra, who took over the reins from Shaktikanta Das. The government was nudging for lower rate regime and Mr. Das seemed to have a different view based on his assessment of inflation situation in India.
Its impact is showing in a way that banks have started cutting lending rates. This is expected to lower the EMIs of credit seekers.
Although the rate trajectory going forward would depend upon the extant inflation scenario and the situation of the domestic economy and we could see some trade-offs between the two to strike a balance. However, a 50 bps points cut by the end of this year is not being ruled out. This could be beneficial both for households and businesses as the yield would come down and facilitate borrowing at lower rates.
Q3 and FY25 outlook
The gross domestic product in the October-September quarter is expected to grow at 6.3-6.4 per cent which is slightly better than the RBI’s projections of 6.2 per cent.
India’s National Statistics Office (NSO) will release the official GDP figures for Q3FY25 and the second advance estimates for FY25 on February 28. While the NSO had last month forecast the FY25 growth at 6.4 per cent the RBI’s estimates remains more optimistic at 6.6 per cent growth.
Economic indicators point to better times now with many high-frequency indicators having turned favourable. This includes passenger vehicle sales, GST collections, petrol consumption and domestic air passenger traffic.
Headwinds
The long-term growth and the vision of a developed Bharat by 2047 can be fulfilled with durable solutions, by addressing the fundamentals. One of the biggest needs of the hour is to accelerate employment generation. More focus may be on labour intensive employment generation that could put incomes in the hand of people.
Many top economists opine that the capital-intensive approach may not deliver immediate results and the slower employment creation is currently deserves more attention. Also, in the age of automation and artificial intelligence, traditionally manual jobs would only go down, creating more challenges.
The Economic Survey 2024-25 highlights a mismatch between the educational qualifications of India’s workforce and the jobs they do. The survey revealed that a mere 8.25 per cent of the graduates are employed in roles that align with their qualifications.
Moreover, when corporate profits hit 15-year high in FY24, the wages remained stagnant.
All this has a bearing on the capacity of people to consume.
So, what is the way out? A bottom-up approach is needed where the focus should be on empowering people rather than just handing out subsidies and freebies. It should happen both at the levels of states and centre.
For instance, the focus should fall back on schemes like Mahatma Gandhi National Rural Employment Guarantee (MGNREG). The allocation for FY26 has been made at Rs 86,000 crore which is flat over the current financial year.
Construction is another big employment generator and it has been doing quite well since the pandemic waned off. While private employment generation could depend upon the demand-supply equation, government’s flagship Pradhan Mantri Awas Yojana serves as a sure-shot generator.
The government has been stressing on its commitment to provide affordable housing to all. For some reason the FY26 budgeted estimates of Rs 19,794 crore are lower than the FY25 allocation in which the government had earmarked Rs 30,171 crore. The actual spending was much lower at Rs 13,670 crore.
The FY26 capital expenditure allocation has seen a minor uptick at Rs 11.2 lakh crore. While the government would want to meet its fiscal deficit target of 4.4 per cent, the modest increase could be owing to a lack of good projects.
The entire responsibility should not rest with the central government and states should also share burden by focusing on creating jobs and simultaneously bringing the cost of living down.
While the RBI and the government appear to be on the same page on the need for lower interest rates, the RBI mandate on inflation remains sacrosanct and managing it at the target of 4+/-2 could be tricky in the post Trump era.
In January, the inflation eased to a five-month low of 4.31 per cent largely on the back of slowdown in food inflation. We are staring at a very long summer and it will be a strong determinant on how food prices move going ahead along with the rural India story.
The current trend show rural consumption is improving, though the urban consumption is losing steam.
Private investment
Private investment remains a challenge and economists are of the view that the companies are working at capacities which is already underutilised and adding more, could become problematic. This is why they have been reluctant to spend leaving most of the heavy lifting to the government.
While the challenges are aplenty, an aggressive government spending and employment creation could be the starting point for the government to bring back the growth on the track.
