India’s real GDP grew at a disappointing 5.4 percent in the second quarter of the financial year, missing the consensus estimates of 6.2–7 percent. GDP growth declined for the third consecutive quarter, with Friday’s figure being the lowest in seven quarters. The slower growth stemmed from various factors on both the demand and supply sides. On the supply side, manufacturing, electricity, and mining experienced declines, while on the demand side, consumption growth slowed, possibly due to a moderation in urban spending. Government expenditure and investments also could have performed better. High inflation eroded the purchasing power of households, while higher borrowing costs and weak demand contributed to the slowdown in the secondary sector. On the production side, weaker growth was evident in the industrial segment. Although the services sector expanded healthily at 7.1 percent, it remained below its potential.
Growth in the second half of the year is expected to be driven by agriculture, which could boost rural demand and increase capital expenditure, which contracted in the first half of the fiscal year. This is unusual, as front-loading capex in the first two quarters has been a hallmark of NDA governments. While the first quarter’s decline is understandable due to the general elections in April–May, the government’s recent indication that capex may undershoot its annual spending target of Rs 11.1 lakh crore for 2024–25 is puzzling. In the first half, only 37 percent of the budgeted capex was spent, compared to 49 percent last year. In the absence of a robust private investment cycle, public expenditure remains a critical driver of India’s future economic growth making it imperative for the government to increase its spending.
The lower-than-expected GDP numbers also reflect the disappointing earnings of listed companies. Several blue-chip firms in the auto and consumer goods sectors reported poor profits due to slower revenue growth. High-frequency data suggests that the third quarter may perform better, partly due to a festive revival in economic activity. However, it remains uncertain whether this momentum can sustain in the fourth quarter. Analysts are now revising their GDP growth estimates for 2024–25 to below 7 percent. While the RBI is expected to keep the repo rate unchanged next Friday, the likelihood of a rate revision in February is back on the table