GDP growth of 5.4 per cent in July-September is a seven-quarter low and is higher than anticipated. While the situation is expected to improve as government spending restarts, the road ahead is not easy amid inflation concerns, poor earnings outlook and Trump’s protectionist zeal.
India’s Gross Domestic Product (GDP) growth numbers for the July-September quarter have missed estimates by a wide margin and have created mini tremors of sorts. While economists had anticipated a slowdown in the GDP growth for Q2FY25, its quantum has surprised many observers.
While several economists had forecast GDP growth rate at 6.5 per cent in Q2, the Reserve Bank of India (RBI) had estimated an uptick of 7 per cent.
Last Friday, the National Statistical Office (NSO) published GDP figure at 5.4 per cent which is a seven-quarter low and it is down by 270 basis points against 8.1 per cent growth recorded in the corresponding quarter of the previous financial year.
The previous low was at 4.3 per cent that was reported in the October-December quarter of financial year 2022-23.
In Q1FY25 (April-June) the GDP growth remained unchanged at 6.7 per cent while in the six months ended September 30, 2024, the GDP growth was recorded at 6 per cent compared to 8.2 per cent in the first half of the previous financial year.
This unwelcome development will only give fresh impetus to the voices which have been demanding an interest rate cut to bolster the economy. But like other economies, India also faces a great dilemma to choose between growth and inflation. It is like picking between devil and a deep sea and it will be interesting to see what Reserve Bank of India (RBI) does in its December Monetary Policy Committee (MPC) meeting. The MPC decisions will be announced on Friday.
The RBI’s own view is that the work on price stability is still a work in progress, indicating that it is in no mood to cut the rates, yet.
However, the government has a different view on this. In her utterances, the Finance Minister recently said that it was time that the RBI began cutting rate to give a further thrust to the economy.
But economists remain divided on this. While one section is recommending for a rate cut, the other view is that any downward revision in rate could be counterproductive as the RBI’s target of 6 per cent inflation is yet to be achieved on a sustainable basis.
In October, the retail inflation shot up above the 6 per cent mark on the back of high food inflation and it remains a niggling problem for the banking regulator.
But with this development, there is a hope that the banking regulator could consider cutting the policy rate from current 6.5 per cent.
What transpired slowdown?
Consumption remains a perennial problem amid high inflation and rural distress. Moreover, the election season had slowed government spending over the last 3-4 months. Adverse weather impacts have also been a big spoiler.
In the manufacturing and mining sector, manufacturing grew at a sluggish pace of 2.2 per cent while mining and quarrying contracted by 0.1 per cent. The GVA (Gross Value Added) growth of the manufacturing sector slowed to 2.2 per cent in the second quarter of the current fiscal against 14.3 per cent growth registered a year ago.
Headwinds a plenty!
While Chief Economic Advisor (CEA) V. Anantha Nageswaran called the Q2 numbers disappointing while not seeing it as alarming, the road ahead is laden with multiple hurdles.
One is food inflation, which in October stood at 10.9 per cent and it was responsible for taking India’s retail inflation to a 14-month high of 6.2 per cent from 5.5 per cent in September. Essentials like vegetables and edible oils saw a sharp escalation in prices, which was highest in several years.
Rupee’s weakening against the USD is also a pain point and it could lead to further surge in inflation.
We are also in the middle of two wars which does not seem to get over in the near term.
But President elect Donald Trump’s return as the US President has set cat among the pigeons. He will assume the charge on January 20, 2025 and he has already made his intentions clear on tariffs and protectionism with his ‘America First’ policy.
He has already announced tariffs on China, Canada and Mexico and more disruptions cannot be ruled out, going ahead.
The chances of inflation going under his watch are high once his protectionist measures start unfolding.
He is also threatening BRIC nations (Brazil, Russia, India and China) with 100 per cent tariff if the Group moved to create a new currency or back any other option as the world’s reserve. The greenback accounts for 90 per cent of the global transaction.
From the Indian standpoint, nothing yet has been announced but his utterances on India have not been very welcome as he called India a tariff abuser.
His stand on immigration is also making the world nervous considering his track record. In his first term, he had imposed travel restrictions in 2017.
Among other things, India Inc’s July to September earnings was also lacklustre with single-digit growth. Inflation and slowing consumption could be unsettling for its future growth.
Moreover, Indian exports are slowing as the global demand for goods and services is seeing a declining trend.
Silver linings
With the election season behind now, India is expected to begin spending which had slowed down. We are also heading towards Union Budget 2025 and we could see government taking measures to revitalise the economy.
Not all was pessimistic on the data front. NSO’s numbers suggest the GVA of the agriculture sector accelerated to 3.5 per cent in the Q2FY25 from 1.7 per cent in the year ago period. Domestic steel consumption remains on a strong footing and had led growth in the construction sector to 7.7 per cent in the July-September quarter. Services sector is also a star performer and it registered a growth of 7.1 per cent with the trade hotels and transport segments registering 6 per cent growth, a media report said.
One of the key GDP drivers, the Private Final Consumption Expenditure (PFCE) grew by 6 per cent in Q2, up from 2.6 per cent in the same period last year though the Government Final Consumption Expenditure (GFCE) saw a recovery, expanding by 4.4 per cent after several quarters of negative or minimal growth.
India is the fastest growing economy and the second biggest market. That makes it lucrative for the world to do business with. The near-term outlook could appear weak but India’s long-term perspective remains intact.
