Context:
India’s GDP growth rate fell to a seven-quarter low of 5.4% in Q2 FY25, down from 6.7% in the previous quarter and 8.1% a year ago.
Answer:
India’s real GDP growth rate fell to a seven-quarter low of 5.4% in Q2 FY25. This decline is attributed to sluggish growth in manufacturing and mining, despite resilience in agriculture and construction. The slowdown raises concerns about cyclical growth challenges amidst global uncertainties and domestic structural inefficiencies.
Primary Reasons for the Slowdown in GDP Growth:
- Sluggish Manufacturing Sector: The manufacturing sector, contributing 17% to Gross Value Added (GVA), recorded only 2.2% growth due to weak demand and import dumping.
- Decline in FMCG and consumer durables demand.
- Contraction in Mining and Quarrying: Adverse weather conditions and policy uncertainties resulted in a small contraction in this sector.
- Extended rainfall disrupted coal and mineral production in states like Jharkhand and Odisha.
- Weakened Consumption Demand: Stagnant real wages and tepid growth in hiring have reduced purchasing power.
- Private Final Consumption Expenditure (PFCE) grew only 6% in Q2 FY25.
- Global Geopolitical Uncertainty: Supply chain disruptions, dollar strengthening, and inflationary pressures have tightened liquidity in emerging markets.
- Rising US interest rates led to capital outflows, depreciating the rupee and increasing import costs.
- Decline in Government Spending: Delays in public capital expenditure due to election-related restrictions contributed to lower spending, impacting overall growth.
- Government Final Consumption Expenditure (GFCE) grew by only 4.4% in Q2 FY25, following a contraction in Q1.
- Self-Generated Private Sector Slowdown: Corporate profit growth outpaced wage and hiring growth, reducing demand and affecting manufacturing sectors.
- The profit-to-GDP ratio reached 4.8% in FY24, while wage growth lagged significantly.
Measures Needed to Revive Economic Growth:
- Enhancing Manufacturing Competitiveness: Incentivise domestic manufacturing through targeted Production Linked Incentive (PLI) schemes and reduce import dependency.
- The PLI scheme for electronics manufacturing has boosted production of mobile phones by over 22% in FY24.
- Boosting Public Investment in Infrastructure: Expand state capacity for capital expenditure (capex) to create jobs and stimulate private investment.
- Increased outlay for infrastructure projects under the National Infrastructure Pipeline (NIP) has improved connectivity and logistics.
- Promoting Private Sector Investment: Provide tax incentives for reinvestment and ease regulatory bottlenecks to encourage capital formation.
- Simplification of the corporate tax regime to 22% has made India an attractive destination for investment.
- Strengthening Consumption Demand: Focus on increasing disposable income through direct cash transfers, tax rebates, and targeted subsidies for rural households.
- PM-KISAN scheme disburses ₹6,000 annually to small farmers, boosting rural purchasing power.
- Streamlining State and Local Governance: Deregulate and simplify approvals at state and local levels to reduce project delays and enhance the business climate.
- Tamil Nadu’s single-window clearance system has accelerated investments in manufacturing.
- Addressing Global Trade Challenges: Strengthen export incentives and diversify markets to mitigate risks from geopolitical uncertainties.
- India’s trade agreements with UAE and Australia have opened new export opportunities.
- Upskilling Workforce for Future Needs: Enhance skill development programs to meet industry requirements in high-growth sectors.
- The Skill India initiative has trained over 2 crore individuals, aligning their skills with industry needs.
- Monetary and Fiscal Coordination: Ensure coordination between RBI’s monetary policy and fiscal measures to maintain liquidity while controlling inflation.
- The RBI’s repo rate adjustments and government’s fiscal stimulus post-COVID-19 are examples of effective collaboration.
To revive growth sustainably, India must address structural inefficiencies while fostering consumption, investment, and exports. A dual focus on public and private sector reforms, coupled with targeted policies for manufacturing and infrastructure, will ensure resilient and inclusive economic growth. Coordination between central and state governments and leveraging global partnerships will further strengthen India’s economic trajectory.
‘+1’ Value Addition:
Doubling down on deregulation, expanding state capacity for public investment, and improving hiring and compensation policies in the private sector are crucial to push growth in India – Chief Economic Advisor V Anantha Nageswaran.
