GDP was lower than expected. Here’s how to move ahead

The expenditure-wise break up of the GDP data showed moderation in consumption, investment and exports. Private consumption growth moderated to 6 per cent, but remains relatively healthy compared to the 4 per cent growth recorded in 2023-24. High frequency economic indicators like FMCG sales volume, two-wheeler sales have been signalling improvement in rural consumption, supported by healthy agriculture production. However, urban consumption seems to be moderating after the sharp jump seen post Covid. High food inflation is having a bearing on overall consumption spending. Slackness in the urban job market, specifically related to the IT sector, is also resulting in poor growth in household income. Moreover, the recent tightening of retail lending norms would have also had some bearing on consumer spending.

Investment in the economy was being strongly supported by the government sector. However, government capex contracted sharply in the first quarter due to election related restrictions and has been slow to recover. Centre’s capex has fallen by 15 per cent in the first half of this year, while the consolidated capex by state governments has fallen by 11 per cent during this period. Investments by major central public sector enterprises also contracted by 11 per cent in the first half, though there has been some improvement in the second quarter.

Coming to the external sector, growth in exports of goods and services has also moderated. Monthly trade data shows that while merchandise exports have been relatively muted in the midst of low global economic growth, services sector exports have sustained their healthy growth momentum.

Let’s now come to the critical issue of what to expect going forward. After the sharp drop seen in the second quarter, we expect GDP growth to pick up in the second half of the year. Consumption growth is likely to see some improvement in the coming quarters supported by healthy growth in agriculture production and rural demand. A likely moderation in food inflation in the coming months would be another factor supportive of consumption. However, we need to be wary of global developments and the risk of imported inflation. The developments in the job market and growth in household incomes would be a critical factor influencing consumption growth.

Government capex that had been weak in the first half is likely to pick up strongly in the second half. In the first half, the central and state governments (consolidated) have only reached 37 per cent and 28 per cent respectively of their budgeted capex for the year. Hence, we can expect a strong pick up in the second half of the year. Even for private investment, there are some positive signals coming from the order book of capital goods and road development companies. The order book of a representative sample of capital goods companies increased by 24 per cent in 2023-24 as against a growth of 4.5 per cent in the preceding four years. In the first six months of this year, the order book of this representative sample has further increased by around 10 per cent. Similarly, we find that for a representative sample of road development companies, the order book has picked up by a sharp 20 per cent in the first six months of this financial year. This could be an indication of a likely pick up in capex in other sectors too in the subsequent quarters. However, the challenge of excess capacity in China and consequent flooding of other markets like India will remain a deterrent for capacity expansion in the country.

Overall GDP growth for this year is likely to be lower at around 6.5 per cent. While this growth number is still healthy, it is concerning as India moves lower from 7-8 per cent growth recorded in the last two years. It is also time to introspect as to what is required to push up India’s potential GDP growth. In the last few years, the government focussed on investment and that boded well for economic recovery post the pandemic. However, there is a need to now give a boost to consumption and more importantly widen the consumption base, ensuring that all segments participate in India’s growth journey. There is a need for fresh triggers to boost consumer sentiments and household spending. A strong push to job creation could provide that trigger. This is especially critical when there are concerns around job creation due to automation.

In the upcoming budget, the government could also look at providing some tax benefits to households to spur consumption. A spurt in domestic consumption would also provide the required trigger for a sustained pick up in private capex. The global environment is likely to remain uncertain in the coming year with implications for the Indian economy. The Donald Trump government in the US and a likely trade war will add further volatility to the global scenario. This makes it even more critical for the government to strengthen domestic demand to ensure sustainable growth.

The writer is Chief Economist, CareEdge Ratings