Economy
RBI’s GDP projections on test as India’s Q2 GDP growth falls short
Summary
In the past few years, RBI’s report card on its GDP projections compared to actual growth have been mixed. Actual GDP growth has both overshot and undershot the projections, often forcing RBI to revise its projections.
The Indian economy experienced a big jolt in the July-September quarter of 2024-25, with the real GDP growth rate slowing to 5.36%, the lowest in seven quarters, data released by the statistics ministry on Friday showed. Not only was this sharply lower than the projection of 7% by the Reserve Bank of India but also lower than the median estimate of 6.5% by 26 economists in a Mint poll.
The second-quarter data raises concerns about whether India can achieve the central bank’s growth forecast of 7.2% for FY25, which it had retained in its October policy meeting. (The next meeting is due next week, where the projections may be reset.) A back-of-the-envelope calculation suggests GDP growth will have to average 8.3% in the second half of the year to align with the RBI’s full-year projection.
“The high-frequency data suggests that festival-linked revival in activity may provide a marginally better growth figure in the second half but overall GDP growth for FY25 is going to be around 100 basis points lower than RBI’s estimate of 7.2%," said Upasana Bhardwaj, chief economist at Kotak Mahindra Bank.
"The GDP miss in the second quarter makes the ask rate very high in October-December for us to even reach 6.5%," added Madhavi Arora, chief economist at Emkay Global.
In the past few years, RBI's report card of projections compared to actual GDP growth have been mixed. The actual GDP has both overshot and undershot the projections, often forcing RBI to revise its projections.
In the September quarter, most sectors saw a slump in economic activity compared to the previous quarter, with mining and construction leading the pack. The growth of the manufacturing sector, known to be the largest sector within industry, slowed to a six-quarter low of 2.2% in Q2 from 7.0% in Q1. However, the agriculture sector showed some resilience, growing 3.47% owing to good kharif sowing. Meanwhile, services output sustained its pace of growth, thanks to contributions from public administration, defence, and other services.
On the expenditure side, both private consumption and investment demand slowed, hurting overall growth. Growth in private final consumption expenditure (PFCE), a proxy for private consumption, slowed sharply to 5.96% in Q2 from 7.45% in the previous quarter.
Gross fixed capital formation, a proxy for investment, also showed a similar slump. However, government final consumption expenditure lent some support to GDP by rising 4.43% during the quarter, a turnaround from a 0.24% decline in the first quarter.
With GDP growth staying below estimates and a spike in inflation in October, economists are expecting the central bank to maintain its neutral stance in the upcoming monetary policy committee (MPC) meeting next week (Inflation in the consumer price index, or CPI, had soared to a 14-month high of 6.2% in October.)
"In light of the recent spike in the CPI inflation, we anticipate a status quo from the MPC next week," said Aditi Nayar, chief economist and head - research and outreach, ICRA Ltd. However, with the GDP growth print sharply undershooting the committee’s expectations, a February 2025 rate cut may be on the table if the next two inflation prints recede, she added.
