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Growth-inflation mix should spur spending, private investments

At a time when several countries are facing stagflation risks, India is witnessing a benign growth-inflation environment. That should spur consumption and investments, paving the way for a steady growth of 7 percent
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India’s GDP growth is blowing hot and cold. If the January-March quarter saw an impressive 7.4 percent growth, beating consensus estimates, the figure for the full 2024-25 fiscal year printed at 6.5 percent—the lowest in four years. Even though the economic momentum seems to have picked up in Q4, the projections for the current fiscal are set at 6.2-6.5 percent, implying that instead of a recovery, growth may slow down sharply. The provisional estimates released Friday also show that the Indian economy’s size stood at $3.9 trillion in 2024-25, as against $3.6 trillion in 2023-24. So it needs a run-rate of at least 6-7 percent to emerge as the world’s fourth largest economy, overtaking Japan at $4.19 trillion, anytime soon. Besides a higher headline rate, we also urgently need a broad-based growth, not the current mix of sub-sectoral surges.

While manufacturing and construction—two key employment generators—picked up pace in Q4, they ended the full year on a disappointing note. Private consumption, a key demand driver, stood at its highest in at least two decades, outpacing GDP growth last year. But analysts suspect that rural consumption was the main engine, while urban spending sputtered. Chief Economic Adviser V Anantha Nageswaran noted that the transmission of interest rate cuts and personal income tax benefits will likely boost urban consumption this fiscal. Helpfully, rural consumption, which saw an improvement due to rising agricultural wages, is expected to retain the momentum, thanks to the above-normal monsoon predicted. While private investments rose in Q4, government expenditure fell with a giant thud. Worse, it’s expected to grow at a slower rate this fiscal, which means we need more private investments now.

Investment demand will likely remain sluggish due to the heightened global uncertainty. But a rising domestic demand could, in part, enthuse companies to expand production. Note that Friday’s data includes provisional estimates and the final numbers will undergo revisions, hopefully upwards. While 2025-26 began on a sour note owing to global trade headwinds, the outlook for domestic growth seems relatively resilient. As Nageswaran noted, at a time when several countries are facing stagflation risks, India is witnessing a benign growth-inflation environment. That should spur consumption and investments, paving the way for a steady growth of 7 percent. At least, that’s the hope at this point.

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