With growth slowing down, to a number which is the lowest in five quarters, the chorus for cutting key policy rates by the RBI’s monetary policy committee slated to meet in October is likely to get louder.

D Dhanuraj, CPPR Chairman, comments on the news published in The Secretariat News.

Driven by lower government spending in an election season and weaker consumer sentiments, India’s economy expanded by 6.7 per cent in the April to June quarter this year against 8.2 per cent in the corresponding period in 2023-24.

The last quarter — Jan-March 2024 —  also saw the economy growing at a faster clip at 7.8 per cent. India’s growth rate during the first quarter of the FY2024-25 at below 7 per cent is thus significantly lower than market expectations and certainly the slowest in the last five quarters.

Earlier, the Reserve Bank of India had pegged the first quarter growth rate at 7.1 per cent. The “wise men and women” on its monetary policy committee (MPC) were split on the eventual decision to keep policy rates steady at 6.5 per cent.

A cut in policy rates acts as a guidance to banks to reduce their lending rates benefiting businesses borrowing money to expand and individuals taking a loan to buy expensive gadgets, automobiles, or realty.

Elsewhere in the world too concerns over slowing economic growth rate have started to crop up. China’s growth rate in the April-June period stood at 4.7 per cent against market expectations of 5.1 per cent. 

“We cannot take solace from the fact that the growth rate of other economies is lower. India must take immediate measures to ensure that growth does not suffer,” D Dhanuraj, Chairman, Centre for Public Policy Research, told The Secretariat.

The chief concern of economists is that for India to become a developed economy by 2047, it needs to ratchet up its growth rate to double digits for the next two decades at least. 

Real GDP or GDP at constant prices in the first quarter stood at Rs 43.64 lakh crore, against Rs 40.91 lakh crore in the same period of 2023-24. 

The Economic Survey, which was presented last month, projected a GDP growth rate of 6.5 to 7 per cent for the current financial year though it said that the country’s economy is on a “strong wicket and stable footing.” Despite the reassurance expressed in the survey, the slowdown in itself is something to be concerned about.

Early Warning Signals?

Apart from reduced government spending due to the general elections, muted demand from the international markets has also led to a drop in exports. India’s merchandise exports in July contracted 1.48 per cent year on year to US$ 33.98 billion compared to an expansion of 2.5 per cent in June 2024. That apart, in the April to June period, growth in bank credit too averaged marginally lower at 15.1 per cent against 15.8 per cent during the corresponding period in 2023-24. 

Earlier, the RBI MPC members had a split opinion on their growth assessment and the need for a cut in the repo or overnight lending rate to banks.

“Early results of listed private manufacturing companies show sales and profits softened in Q1 FY25. Consumer confidence fell and the business expectations index has been moderating since Q4 FY24,” Ashima Goyal, MPC’s external member had said in the latest MPC meeting, while arguing for a policy rate cut.

Uncertain Global Growth

The increasing uncertainty in the global economy has multiplied problems for India’s policymakers. JP Morgan in its research note raised the probability of a US and global recession starting before end-2024 to 35 per cent — up from 25 per cent in its mid-year outlook, driven by the latest economic developments.

Investment banking major Macquarie Group, in its report, noted that the risk of recession lingers in several key markets. “Naturally these factors will continue to shape the investment environment, but one of the biggest changes in the last year is the level of geopolitical risk, tragically evidenced in Ukraine and the Middle East,” it said.

The UN Trade and Development (UNCTAD) also warned that the global economic growth in 2024 will slow down 2.6 per cent — just above the 2.5 per cent threshold commonly associated with a recession.

Though the US economy showed resilience in the first half of this year, the grim jobs report in July has shaken policy watchers and analysts. The US employment rate came down to 60 per cent in July from 60.10 percent in June of this year. The going may get tougher for Europe as well.

The possibility of a recession could also prompt the US Federal Reserve to reduce interest rates in the upcoming meeting on 17 and 18 of September.

Sectoral Growth Story

India’s construction activity and public utility services — gas, electric, and water supply — grew at a faster clip of 10.5 per cent and 10.4 per cent respectively, belying the overall slowing down of GDP growth.

Agriculture, services (tertiary sector), and overall imports grew at a slower rate of 2.0 per cent, 7.2 per cent, and 4.4 per cent, respectively, compared to first quarter figures of 2023-24. While manufacturing (which accounts for roughly 17 per cent of the economy) grew at a healthy rate of 7 per cent, even that was lower than the 8.9 per cent recorded in the last quarter.  

India’s economy expanded by 6.7 per cent in the April to June quarter this year against 8.2 per cent in the corresponding period in 2023-24.

Overall, the service sector took a large hit. The services sector which grew by 10.7 per cent in the first quarter of 2023-24, grew by just 7.2 per cent in the quarter ended June 31, 2024.

With the election season on, government final consumption expenditure (PFCE) turned negative and shrank by 0.2 per cent. However, private final consumption expenditure (PFCE), which now has 56.3 per cent share of overall GDP,  revived growing 7.4 per cent compared to 5.5 per cent during the same period last year. 

However, the growth rate of gross fixed capital formation (GFCF) or investment has further fallen to 7.5 per cent from 8.5 per cent in 2023-24. Though there have been expectations about private investment picking up following the public investment uptick (particularly through the capital expenditure route), GDP data show that those expectations remain unfulfilled.

Export growth is back in the positive zone at 8.7 per cent, compared to last year’s negative Q1 growth. Imports growth, however, has fallen downwards year-on-year by more than three and half times at 4.4 per cent. This may be good news for the balance of payments and enhancing GDP growth.

Why Things Are Not Rosy

For a growing emerging economy like India, lower import growth also means that fewer capital goods (like factory machinery and plant equipment) are being brought in. That, in turn, implies subdued economic activity.

The economic environment, as indicated by these latest quarterly GDP figures, points towards the fact that the country continues to face a challenge in creating new jobs with growth in services and agriculture (which account for more than 70 per cent of total jobs in the economy) still muted.

Much will depend on government spending picking up to spur growth. This year’s budget at Rs 48.2 lakh crore is expected to help push actual spending on housing, infrastructure, and rural jobs up. So, utilization of budgeted allocations in the current financial year will be crucial for sustaining the GDP momentum.

Way Forward For India

Going ahead, it will be critical for the Narendra Modi government to adhere to its capital spending plans if it has to clock a growth rate of around 7.1-7.2 per cent.

What has brought cheer to the policymakers is the growth in the Purchasing Managers Index (PMI) for both manufacturing and services. Manufacturing PMI expanded to 58.1 and services to 60.3. The PMI is considered an important data point indicating the existing trends of economic activities especially concerning the manufacturing sector, capturing upstream and downstream activities.

With the country’s economic growth rate now starting to slow down, the central bank, which has kept the policy rate unchanged at 6.5 per cent for nine consecutive cycles, may finally have to reduce rates in its next monetary policy committee meeting.

“With fiscal policy doing its part, monetary policy must also keep the repo rate as low as is consistent with reaching the inflation target,” Goyal had said.

Views expressed by the author are personal and need not reflect or represent the views of the Centre for Public Policy Research.