India’s GDP growth: The first half faltered, but economy seen rebounding in the second
- Economists see rural consumption, festival spending, and higher government expenditure reviving India’s economic growth, which remains among the world’s fastest.
Two consecutive quarters of disappointing economic growth have left economists pinning their hopes on a rebound in the second half of the fiscal year. The expected levers to serve up a glass half full: higher government spending, the ongoing festival season, and robust rural consumption.
These triggers are expected to compensate for a slowdown in manufacturing and urban consumption, and disappointing corporate earnings. These factors pulled down India’s gross domestic product (GDP) growth in the September quarter to 5.4%, data released by the ministry of statistics and programme implementation (MoSPI) on Friday showed.
This was the slowest in nearly two years, and lower than economists’ estimates. A Mint poll of 25 economists had predicted 6.5% growth for Q2. In the first quarter, India’s GDP growth was 6.7%, and 8.2% in the year-ago period.
To be sure, India remains one of the world’s fastest-growing major economies. The Union finance ministry, too, in its latest economic review forecast a rebound in the second half of 2024-25 driven by stronger rural demand and increased government spending.
Some economists, however, expect India’s FY25 GDP growth to be lower than the Reserve Bank of India’s (RBI's) 7.2% outlook because of the disappointing economic growth in the first two quarters of the fiscal year.
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 central bank’s full-year projection.
“The high-frequency data suggests that festive-linked revival in activity may provide a marginally better H2, FY25 growth figure. But overall GDP growth for FY25 is going to be around 100 bps (basis points) lower than RBI’s estimate of 7.2%,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
However, despite the sharp fall in GDP growth, economists don’t expect RBI to lower its key policy rates when its monetary policy committee meets next week, given India’s high inflation and food prices as well as geopolitical uncertainty. RBI has kept the repo rate unchanged at 6.5% since February 2023.
India’s chief economic adviser, V. Anantha Nageswaran, said there was no reason to believe that the latest quarterly growth figure marked the start of a lasting trend, adding that overall, higher growth could be expected in the second half of the financial year.
He also emphasized the need to address the barriers hindering capital formation. “There are certainly impediments that need to be examined,” Nageswaran said. “Some of this could be attributed to excessive rainfall in the second quarter and uncertainties surrounding the election season. However, there is significant potential for capital expenditure to ramp up in the remaining three to four months of the year.”
Madan Sabnavis, chief economist at Bank of Baroda, too expects steady growth in the second half of the financial year. “Consumption is already recovering with festival and rural spending and the wedding season,” he said. “Government will expedite budget spending… The third investment shows positive signs as intentions are higher than last year post-July.”
But Sabnavis, too, expects India’s economic growth for FY25 to be below RBI’s outlook, at 6.6-6.8%.
Global disturbances
Nageswaran said India’s slower-than-expected second-quarter real GDP growth presented an opportunity to focus on key structural reforms. “It is a good moment to reassess not only hiring and compensation practices in the private sector but also to double down on deregulation,” he said. “Additionally, this is an ideal time to strengthen state capacity for public investment, shifting focus from revenue expenditure to long-term growth-enhancing initiatives.”
Nageswaran said the slowdown in manufacturing aligned with global trends and was partly attributable to excess capacity in other regions and instances of import dumping in India.
He also said that geopolitical risks and uncertainties had intensified in Q2, particularly in the lead-up to the US presidential election, emphasizing that a significant surge in trade uncertainties also accompanied the election season, adding to the challenges.
“In India, it is evident in the divergence between rising steel consumption and stagnant steel production,” Nageswaran said, highlighting the challenges faced by domestic manufacturing sector. “So these were some special factors that played a role in amplifying the growth slowdown.”
Market experts expect the slowdown to fuel concerns among economists and market participants, sparking debates on potential monetary policy changes by RBI. Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap Llp, a financial advisory, said the Indian 10-year government bond yield softened to 6.74% from 6.80% on Friday, reflecting market expectations of a dovish RBI stance.
“While inflation remains within RBI’s comfort zone, providing scope for rate cuts, global uncertainties and domestic risks suggest policymakers may take a cautious approach,” he said, adding that most economists anticipate a wait-and-watch strategy in the December monetary policy committee (MPC) meeting.
“While the growth slowdown has heightened calls for easing, a repo rate cut may not be imminent. February is seen as a more realistic timeline for potential action,” Srinivasan said.
Uneven sectoral performance
Economists blamed the slower GDP growth in the second quarter also on uneven performance across sectors, with a decline in private consumption growth offsetting the positive effects of government spending and a rural recovery.
The unexpectedly weak GDP growth figures also mirror disappointing corporate earnings, with the manufacturing sector bearing the brunt of the impact, they said.
Manufacturing growth in the September quarter slowed to 2.2% from 14.3% in the year-ago second quarter and 7% in the June quarter.
However, a recent revival in rural consumption is providing optimism.
“The main indicators of consumption so far indicate that the skewness in the consumption growth is correcting somewhat with the pick-up in rural real wages, two-wheeler sales, etc.,” said Devendra Kumar Pant, chief economist at India Ratings and Research. “The quarterly results of the FMCG (fast-moving consumer goods) companies also point to a sustained recovery in rural demand, which is favourable both for consumption as well as GDP growth.”
He added: “The major components apart from the public sector for capex are households and the private sector. A higher growth in the public sector capex along with a steady capex by the household sector (as visible via the housing sales data) indicates a modest pickup in the private sector capex.”
Vineet Agarwal, managing director of Transport Corporation of India Ltd, is similarly optimistic. “With a pickup expected in capital expenditure by the government, growth in demand during the festive season, and stable rural demand, we are likely to see better numbers for the coming quarters and FY 2025.”
Agriculture, transport bounce back
As for other sectors, agriculture, hospitality, transport, broadcasting services and communications bounced back in the second quarter.
Agriculture reported a 3.5% growth for July-September, against 1.7% growth in the same period of the previous year and 2% growth in the June quarter.
Mining, however, contracted by 0.1% in the second quarter against 7.2% growth in the preceding three months and an 11.1% jump in the year-ago September quarter.
Construction sector growth slowed to 7.7% in Q2 from 13.6% growth in the year-ago second quarter and 10.5% in the latest first quarter.
Utility services such as electricity, gas, and water supply grew at 3.3% in the latest quarter, compared to 10.5% and 10.4% growth in the year-ago period and the June quarter, respectively.
Hospitality, transport and broadcasting services reported a 6% growth in Q2, up from 4.5% growth a year earlier and 5.7% rise in the latest first quarter.
Export growth (goods and services) slowed to 2.8% year-on-year in Q2, down from 8.7% in Q1. While services exports surged 13.6% year-on-year in rupee terms, marking a five-quarter high, merchandise exports declined by 2.6% year-on-year, the first drop in four quarters.
Imports contracted by 2.9% in Q2, breaking a five-quarter growth streak.
Net tax growth also declined—to 2.7% in Q2 from 4.1% in Q1 and 7.4% in the year-ago second quarter.
GVA growth decline
Gross value added (GVA), which measures the total value of goods and services produced in an economy, grew by 5.6% in the September quarter, down from 7.7% in the same period last year. GVA growth in the first quarter was 6.8%.
On the expenditure side, private final consumption expenditure (PFCE), a proxy for private consumption, stood at 6% annually in the September quarter, down from a seven-quarter high growth of 7.4% in the preceding first quarter but above the 2.6% growth registered a year earlier.
However, government final consumption expenditure (GFCE), a proxy for investment, grew 4.4% annually in the second quarter, swinging from a decline of 0.24% in the April-June period that was marked by disruptions in government spending due to the national election. In the year-ago second quarter, though, India’s GFCE was much higher, at 14%.
Gross fixed capital formation (GFCF) slowed to 5.4% annually in Q2 from 11.6% in the year-ago period and 7.5% in the latest first quarter, indicating a slowdown in investments.
Payal Bhattacharya contributed to this story.
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Business NewsEconomyIndia’s GDP growth: The first half faltered, but economy seen rebounding in the second
First Published:30 Nov 2024, 10:32 AM IST
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