Rural demand is likely to improve as the kharif output has been healthy and the outlook for the rabi crop also looks promising. Alongside, government capex is likely to grow at a healthy pace in order to meet its budget target.
Nov 30, 2024 03:30 IST First published on: Nov 30, 2024 at 03:30 IST
Over the past few weeks, several indicators have suggested that the economic growth momentum in the country slowed down sharply in the second quarter. Recently, some companies have spoken about a “softness” in urban demand and a “shrinking” middle segment. The finance ministry had also pointed towards the “incipient signs of strain in certain sectors” and the “moderation in urban demand” in its recent monthly reviews. Data released by the National Statistical Office on Friday shows that the extent of the slowdown has been more severe than what many had expected. The economy grew at just 5.4 per cent in the second quarter, down from 6.7 per cent in the first quarter. This is significantly below expectations — while the consensus among analysts was that growth will be around 6.5 per cent, the RBI had pegged it to be even higher at 7 per cent.
The disaggregated data makes for sobering reading. The mining sector has contracted. Manufacturing has grown at a mere 2.2 per cent, down from 7 per cent in the previous quarter. The construction sector has slowed down, as have the electricity, gas and water supply segments. Even large parts of the services sector — financial, real estate and professional services — have registered slower growth. Both investment activity and private demand have moderated, with the latter in urban areas being possibly weighed down by a combination of high food inflation and subdued real wage growth. In nominal terms, the Indian economy has now grown at 8.9 per cent in the first half of this financial year. Nominal growth was less than 10 per cent last year as well. However, there is a view that the economic momentum will pick up in the second half of the year. Rural demand is likely to improve as the kharif output has been healthy and the outlook for the rabi crop also looks promising. Alongside, government capex is likely to grow at a healthy pace in order to meet its budget target.
In October’s monetary policy committee meeting, the RBI had projected growth at 7 per cent in the second quarter, and at 7.2 per cent for the full year. Its state of the economy report published in the October bulletin had pegged second quarter growth to be marginally lower at 6.8 per cent. Considering that actual growth is 1.4 percentage points lower, it implies that the central bank will now have to revise downwards its growth forecast for the year. So far, resilient growth had provided the monetary policy committee the space to focus on inflation, keeping policy rates restrictive. But with growth slowing down, and inflation still elevated, though there are expectations of prices moderating over the coming weeks, the policy choices before the RBI seem to be narrowing.
