Dec 01, 2024 07:56 PM IST
India’s GDP growth slowed to 5.4%, exceeding expectations, driven by weak manufacturing and investment. The global environment poses further challenges.
That the Indian economy would lose some momentum as the pent-up demand from the pandemic was exhausted was a given. However, GDP numbers for the last two quarters suggest that the slowdown is turning out to be of a higher magnitude than expected. The September quarter headline GDP growth of 5.4% was more than a percentage point lower than what private and the Reserve Bank of India (RBI) forecasts expected.
Almost all the negative surprise in growth is on account of slower momentum in the secondary — manufacturing, construction, electricity and utilities — sector. When read with what seems like an entrenched stuttering in the private capex engine — this is despite bank and company balance sheets being the healthiest they have been in many years — this lends itself to only one explanation. The Indian economy’s tepid growth performance is a result of weak animal spirits triggering a vicious cycle of poor future demand outlook holding back current investment which in turn is weighing down on current demand.
What will it take to correct this?
Will a reduction in interest rates suffice? It should definitely help, at least in terms of boosting consumption by bringing down the mortgage payment burden of households. But there’s also talk in the street that RBI’s regulatory crackdown on unsecured non-bank lending and not higher bank rates have played a bigger role in slowing down consumption demand. Growth at the cost of stability is never beneficial in the long run, so there is no point in criticising RBI here. Fiscal tailwinds to growth, given the consolidation imperative, will only weaken going forward.
To surmise, there are no low-hanging fruits to boost growth right now. India has done well to retain its growth momentum without comprising macroeconomic fundamentals unlike most major economies in the post-pandemic period. However, settling at a sub 7% growth path is not an option for the world’s most populous country whose demographic dividend window is now gradually closing.
Unfortunately for India, the global environment is going to be far from conducive to boost growth. A mercantilist US under Donald Trump and the Chinese economy sitting on massive excess capacity are the two biggest headwinds.
Can domestic policy priorities reinvent themselves? This is exactly where economic policy must think out of the box. Hopefully, the next Union budget will do justice to this challenge.
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