Jan 08, 2025 08:19 PM IST
Creating mass demand, leading to a boom in investment, is necessary; encouraging consuming classes to spend will help
Last year, when India’s GDP growth came in at 8.2% in 2023-24, some analysts were overly optimistic about India’s medium-term growth prospects. And on Tuesday, after the first advance estimates for 2024-25 growth put the number at 6.4%, some analysts have been overly pessimistic about them. A careful reading of last year’s numbers — Gross Value Added (GVA) growth was a percentage point lower and higher GDP growth numbers were basically a reflection of the rollback in subsidies — should have warned against excessive optimism. Tuesday’s estimate puts GVA growth also at 6.4% in this fiscal year. Simply put, the slowdown vis-a-vis last year is relatively lower if one uses GVA as the benchmark.
Still, it’s hard to deny that the economy has begun to lose momentum. A disaggregated reading shows that the slowdown is being driven by investment rather than consumption and non-farm non-government sectors of the Indian economy. In other words, what the Indian economy is lacking is the proverbial catalyst of animal spirits to kickstart the private investment part of the growth reaction.
What explains this? Private investment is based on an expectation that existing capacity will not be adequate to cater to future demand. Low private investment means a bearish view of demand. Once again, this should not be surprising. (Food driven) headline inflation staying above RBI’s target notwithstanding, core inflation — the non-food non-fuel and hence seasonally immune part of the CPI basket — has been trending towards its lowest ever levels throughout this fiscal year. This means that current demand in the economy is pretty much in line with capacity.
What will it take to rekindle the animal spirits?
We should remember that the IMF’s potential growth estimate — the rate at which an economy can grow without triggering inflation — for India is 6.3%, which is pretty much what the GDP growth is. It is also useful to remember that a lot of the investment growth post-pandemic came from the rise in government capex which is likely to lose momentum going forward given the imperative of fiscal consolidation.
Sure, RBI cutting rates in February or April could generate some growth tailwinds and this should be done. And the government needs to consider what else it can do to push mass demand, which will then result in a boost in investment. This is not an easy question to answer, but a focus on the consuming classes in the Union Budget could be a good starting point.
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