Mint Primer | Slowdown: Time to recalibrate India’s growth story in FY25?

Why did the Q2 GDP growth surprise?

A slight slowdown in economic growth was expected in the second quarter of 2024-25 (FY25). But when the GDP number came in at 5.4%, the lowest in nearly two years, it shocked one and all as it was way below expectation. It raised concerns about the severity of the factors smothering growth. In the corresponding period last year, the growth posted was a heady 8.1%. In the first quarter, the economy grew by 6.7%. In Q2FY25, GDP growth numbers have now declined for the third consecutive quarter (see chart). The rapid pace of growth the economy posted just last year suddenly looks distant.

What has caused this slowdown?

Three of the four engines of growth are sputtering. Private consumption has declined as have private investment and exports. Only government spending has grown after a poor show in Q1. But even here, government spending in the first half of the fiscal year is much lower than that of the same period previous year. Sector-wise it was industry that was the letdown. Manufacturing declined sharply on account of slowing domestic, especially urban, demand and sluggish exports. Mining and power generation sectors underperformed as they were impacted by wetter-than-usual monsoon rains.

Also read |  Natural farming: Ambitious plan, but will it work?

Are there any silver linings on the horizon?

Yes. Agriculture has done well. It grew by 3.5% as against 2% in Q1 on the back of good rains and strong sowing. Higher kharif arrivals should cause food inflation to ease and that should free the Reserve Bank of India to start cutting interest rates. Agriculture recovery will also improve rural demand and consumption. State government capex will hopefully recover.

Also read | IT services: When will the tide turn?

What are the headwinds?

Urban consumption has slowed sharply and experts do not see an immediate recovery. Exports remain sluggish. The outlook remains weak as the world heads into a potential trade war and slowing global economic growth. A weakening rupee can trigger inflationary pressures. Private sector capex has shown little signs of recovery. The urban consumption slowdown will only delay this further. Though Central capex has recovered, spending by the state governments has been slow due to their tight finances.

Also read |  Why are banks issuing fewer credit cards?

Will this mean slower FY25 growth?

Economists have started trimming growth estimates. Emkay Research has trimmed the FY25 growth to 6% from its earlier estimate of 6.5%. Crisil has reduced the growth to 6.8%. The economy grew by 8.2% in FY24. They expect lower growth for a reason. The nominal GDP growth in the first half of FY25 is just 8.9%. The economy must grow at over 12% in the second half to match the 10.5% growth the government has assumed in the budget. Considering the headwinds, this looks like a very tall order.