India’s Q2 GDP growth eased to 6.3% on a normalising base, but what’s more unsettling is that we seem to be on a rough trot.
Amid fears of a looming global polycrisis—a situation where multiple crises due to economic and non-economic shocks occur—growth cuts are coming at us without a heartbeat’s pause. Add to this the declining households’ purchasing power both due to rising interest rates and depletion of accumulated pandemic savings and an incomplete labour market recovery, India’s growth estimates too are being lowered not just for the next two-quarters of this fiscal, but also the next fiscal.
If FY23 estimates are pared down to 6.8% or thereabouts from 7–7.2% projected earlier, FY24 projections are down to 6–6.3%. Put another way, the Indian economy is spinning in its orbit, but not at the pace it needs or desires to.
Worsening global growth will affect India’s exports, which in turn could weigh heavily on domestic industrial activity, which, as it is, was the primary drag on real GDP growth in Q2.
Even if domestic demand stays resilient until the catch-up in contact-based services fades, it sure would be tested by weakening industrial output. Notably, the manufacturing sector already contracted by 4.3% in Q2 against a 4.8% growth in Q1. Likewise, construction too slowed down to 6.6% from 16.8%, while fixed investments grew by 10.4% in Q2 as against 20% in Q1, suggesting that private investment was yet to pick up materially. Helpfully, the government’s capex growth was robust at 42% in Q2 (though lower than 57% in Q1), but government expenditure contracted by 4.4%. Rising subsidies, including food and fertilisers, have upset the budget math, forcing aggressive expenditure rationalisation within the first half of the fiscal.
Additional government spending will leave us with an unmistakable breach in fiscal deficit, even though some of it will be absorbed by higher tax collections and nominal GDP growth. Economists have already begun reminding the government about the need for fiscal correction and the glide path target of 4.5% by FY26.
Domestic economic recovery is yet to be broad-based. Amid shrinking corporate profitability and demand-curbing interest rates that weigh on output, government and private investments are essential for a stronger and complete recovery. A slowing economy will need higher investments, and government spending must do the hard yards until at least private investment recovers.