The recently released GDP figures for the second quarter (Q2) of 2024-25 highlight a significant slowdown in India's economic growth. The year-on-year real GDP growth rate has declined significantly to 5.4 percent, down from 8.6 percent in Q3 2023-24, signalling a return to growth levels last seen two years ago. Besides the numbers, the quality of growth has raised concerns about the near-term economic trajectory, the implications for the coordination of monetary and fiscal policies, and adherence to fiscal discipline.
The deceleration is primarily driven by the weakening investment and exports. Gross fixed capital formation, a key measure of investment in fixed assets, has significantly declined from 11.6 percent in Q2 of 2023-24 to just 5.4 percent in Q2 of 2024-25, with half-yearly growth also slowing from 10.1 percent in the first half of 2023-24 to 6.4 percent in the corresponding period of 2024-25. This underscores the waning momentum in capital investments, which are critical for sustained economic expansion.
The stark reversal in import growth further highlights the weakening dynamics. What stood at 11.6 percent in Q2 of 2023-24, has plunged to -2.9 percent in Q2 of 2024-25. This contraction, often reflective of reduced domestic demand and economic activity, adds to the growing concerns about the economy's overall health and trajectory.
Growth in government spending has also lost steam, underscoring a decline in fiscal impetus. In Q2 2023-24, government spending grew 14 percent, but this has dropped sharply to just 4.4 percent in Q2 2024-25.
Amid these concerning trends on the expenditure front, the only silver lining appears to be the steady growth in private consumption. In real terms, private consumption has expanded at a robust 6.7 percent in the first half of 2024-25, up from 4 percent during the same period last year. This suggests resilience in household spending and consumer demand.
On the supply side, the slowdown is particularly evident in manufacturing and mining. Manufacturing growth has plummeted from an impressive 14.3 percent in Q2 2023-24 to a modest 2.2 percent in Q2 2024-25. The mining and quarrying sector has also faced a significant setback, transitioning from a healthy growth rate of 11.1 percent in Q2 2023-24 to a contraction of -0.1percent in Q2 2024-25. These numbers indicate mounting challenges in key industrial sectors, likely driven by subdued demand, rising input costs, and global headwinds.
A silver lining on the supply side is the agricultural sector, which has shown a notable improvement in its quarterly performance. The sector's growth rate has nearly doubled, increasing from 1.7 percent in Q2 2023-24 to 3.5 percent in Q2 2024-25. However, in the first half , agricultural growth has seen a slight dip, declining from 2.8 percent in H1 2023-24 to 2.7 percent in H1 2024-25.
The observed trends carry significant implications for monetary-fiscal policy coordination, particularly in balancing the dual objectives of supporting growth and maintaining macroeconomic stability. The sharp decline in growth is likely to heighten expectations for the RBI to adopt a more accommodative monetary policy stance in its ongoing monetary policy review. However, given the persistent inflation, the central bank is unlikely to ease monetary policy significantly.
In such a scenario, the responsibility to support growth would fall more heavily on the government. To achieve the finance ministry's projected growth rate of 6.5-7 percent for 2024-25, we might witness increased fiscal spending in the coming quarters, leading to fiscal deficit overshooting the budgeted figures.
A more problematic issue is that in recent years, the growth in demand has been driven largely by a surge in government capital expenditure. However, this has yet to translate into significant crowding-in of private investments in critical sectors such as manufacturing.
The muted response from private investors could stem from structural challenges, global demand uncertainties, and an investment climate still recovering from multiple domestic and global disruptions. This underlines the importance of calibrated fiscal measures to complement public spending and create an enabling environment for private sector participation.
To sustain economic momentum and address sectoral weaknesses, a series of targeted interventions will be necessary:
1. Recent policy measures mandating public sector enterprises to source at least 25 percent of their procurement from micro, small and medium enterprises are a step in the right direction. This could enhance the demand for goods produced by small and medium enterprises, which are crucial for employment generation and industrial growth.
2. Supporting smallholder farmers through initiatives like better access to credit, modern agricultural practices, and infrastructure improvements will ensure consistent and robust growth of agriculture.
3. The government will need to look at simplifying compliance mechanisms and offer incentives to encourage private players to invest in manufacturing, green energy and digital infrastructure.
4. Addressing regulatory bottlenecks, streamlining mining permissions, and investing in technology can revitalise the mining sector.
5. Simultaneously, initiatives to reduce input costs and improve global competitiveness could revive manufacturing growth.
The latest growth figures highlight the increasing challenge of retaining the coveted title of the 'fastest-growing economy'. The pursuit of growth is likely to involve two significant trade-offs––navigating the complexities of fiscal-monetary policy coordination and risking a compromise in fiscal discipline.
(Views are personal)
Tulsi Jayakumar | Professor, finance and economics; Executive Director, Centre for Family Business and Entrepreneurship at Bhavan's SPJIMR