GDP growth in the first quarter fell short of the RBI’s expectations. At 6.7 per cent, growth is still higher than the decadal average of 6.4 per cent for the first quarter. Economic activities were clearly influenced by seasonal factors and the general elections during that period.
Despite the low number, the Q1FY25 throws up more positive trends than what the headline estimate suggests. Demand shows a largely positive picture with all heads except valuables showing positive growth. Private consumption grew by a robust 12.4 per cent in current prices. Robust consumption data reaffirms that the rural rebound remains strong. An uptick in agricultural growth in subsequent quarters on the back of a better monsoon will provide a strong impetus. Investments also registered a healthy growth of 9.1 per cent in current prices with investment rate at 31 per cent. Government expenditure registered a growth of 4.1 per cent, which was slower but it must be kept in mind that the general election was held in the first quarter. For example, government spending fell by close to 20 per cent quarter-on-quarter. Spending is, however, likely to have revived in the second quarter.
Adjusting for inflation, the expenditure heads show traction in private demand and capital formation. Exports registered a growth of 8.4 per cent while imports slowed considerably both sequentially and on a year-on-year basis on account of slowdown in oil demand and decline in imports of valuables such as gold.
On the supply side, gross value added grew by 6.8 per cent and the gap between GDP and GVA shrank to merely 19 basis points as compared to an average gap of 122 bps in preceding three quarters. Core GVA, a component of private demand, also registered a growth of 7.3 per cent.
Agriculture grew by a mere 2 per cent. However, the normal monsoon bodes well for kharif crop sowing and soil moisture retention in the coming months. La Niña conditions, originally expected to emerge in August, may now arrive by November. This will impact food CPI aiding consumption. The performance of the broader industry was robust with electricity and others, and construction registering double digit growth. The momentum in services also continued but at a slower pace. However, the strong growth in electricity should not distract us from discom reforms. Accumulated losses by many state discoms need to be tackled.
How does the 6.7 per cent number impact the outlook for the year? The RBI projected GDP growth for the full year at 7.2 per cent, based on a first quarter growth of 7.1 per cent. We believe that RBI’s estimate of 7.2 per cent still looks reasonable.
Recent data indicates a moderation in bank credit growth, though credit has increased to industry which is a positive for the economy and has a multiplier effect on employment and growth. Overall, the economic momentum remains intact. The rebalancing of demand from private consumption to investments supported by government capex needs further support. Private investment activity looks robust and domestic monetary conditions remain supportive of growth this year. A rate cut is on the cards and can come by the end of 2024 or early 2025.
As 7 per cent plus growth for the current year looks possible, the government should move ahead with the implementation of the nine priorities it had mentioned in the budget in a time-bound manner. These could be bucketed in a list of short and medium term priorities. We mention only two of them here.
The Budget had announced a self-financing guarantee fund with a cover of up to Rs 100 crore. It may be noted that the Emergency Credit Line Guarantee Scheme (ECLGS) had a corpus of Rs 41,600 crore that generated an additional lending of Rs 4.5 lakh crore to the MSME sector. Thus, say with a Rs 10,000 crore corpus and 100 per cent guarantee like ECLGS, this new scheme has the potential of additional MSME loans of Rs 1 lakh crore. Maybe, we can also launch a credit guarantee fund for the agricultural sector in subsequent budgets with the completion of digitisation of land records.
Additionally, the idea of banks using their own in-house capability to assess MSMEs for credit eligibility by using tax payments and even tax returns is an innovative idea. This transition will enable banks to truly own the customer value chain. Ultimately, this could culminate in banks building a UPI-like model for financing SMEs — through integration with CBDT/GST/EDI data.
Digitisation of land records in rural areas and linking them to the farmer registry is a move that could potentially benefit 7.4 crore farmers having operative KCC accounts. It may be noted that digitisation has been completed in 95 per cent of 6,57,397 villages. Once the farmer registry is completed, the data can be effectively used for unique lending to farmers and could ensure a bulge in agri-credit growth. There is now a genuine demand for loans with higher ticket sizes than the current RBI permissible limit of Rs 1.6 lakh sans collaterals.
In urban areas, the digitisation of all land records with GIS mapping could supplement the efforts of state governments in terms of updating, maintaining and administering property taxes and going completely faceless and making the process automated. This could potentially change the financial position of urban local bodies. Currently, 50 per cent of the own tax revenue of municipalities comes from property taxes.
So what should not be done? In states like Punjab, the groundwater level of three-fourths of the blocks falls under the over-exploited category, while only 13 per cent of blocks are in the safe category. Thus, running the MSP in its present form is undesirable for all stakeholders. Instead, the focus should be to build agri value chains. A calibrated adoption of the recommendations of the 2021 committee headed by Challa S Setty of SBI is needed.
The writer is member, 16th Finance Commission and Group Chief Economic Advisor, State Bank of India. Views are personal
