GDP growth hits 5.4% in Q2, lowest in 7 quarters

Context: India’s real GDP growth slumped to a seven-quarter low of 5.4% in the
July to September 2024 quarter, much lower than even the most pessimistic
independent projections, from a five-quarter nadir of 6.7% in the first quarter
(Q1), with Gross Value Added (GVA) growth slowing to 5.8% from 6.8% in Q1. Reserve
Bank of India (RBI) has estimated GDP growth of 6.8% in Q2 citing economic
activity indicators, this was enunciated in October monetary policy review.

Key points

·      
Overview: For the full year 2023-24
(FY24), India’s Real GDP is estimated to have grown at a robust 8.2%.

·      
India’s GDP Growth Performance: Slowest
Growth in Seven Quarters - India’s Gross Domestic Product (GDP) grew by 5.4%
in the July-September 2024 quarter, down from 6.7% in the previous quarter.
This is below the 6.5% projected by analysts.

Sectoral Slowdown - Manufacturing grew by just
2.2%, compared to 7% previously, driven by weak consumer demand, inflation, and
high borrowing costs. Private Consumption, constituting 60% of GDP, slowed to
6%, reflecting reduced demand for goods.

Rural-Urban Dynamics - Rural demand showed
recovery due to strong agricultural output (+3.5%), while urban demand lagged
due to high inflation and weak wage growth.

·      
Economic Concerns and Policy Challenges: Policy
Pressures - Economists suggest the Reserve Bank of India (RBI) might need
to cut the repo rate, currently at 6.5%, to stimulate growth. The government
faces challenges in balancing growth targets, inflation control, and job
creation.

Private Sector Issues - Weak hiring and wage growth
have reduced purchasing power and dampened demand, particularly for consumer
goods. The profit-GDP ratio grew to 4.8% in FY24 but did not translate into
proportional compensation or job growth.

·      
Structural Recommendations: Deregulation
- Double down on deregulation, especially at state and local levels, to
foster ease of doing business and increase investment.

Public Investment - Focus on increasing capital
expenditure (capex) for long-term infrastructure development.

Private Sector Responsibility - Improve hiring
practices and wage growth to sustain demand and boost private consumption.

Geopolitical Risks - Address challenges like supply
chain disruptions, rising US dollar strength, and tightening liquidity
conditions in emerging markets.

·      
Positive Outlook: Resilience in
sectors like agriculture, construction, and parts of manufacturing supports
optimism. Record production in Kharif food grains and promising prospects for
Rabi crops signal rural economic recovery. The labour market shows signs of
improvement, though further policy efforts are needed.

·      
Conclusion: India’s growth
remains one of the fastest among major economies but faces challenges from
domestic constraints like weak consumption and global risks such as
geopolitical uncertainties. Policymakers must balance stimulating growth with
controlling inflation, focusing on structural reforms and private sector
participation.