Growth slowdown? No cause for alarm, just a call for efficiency

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Although India is neither a dark horse nor an underdog, its growth forecasts continue to be underestimated by institutions. While the International Monetary Fund (IMF) predicted a 6.5-6.7 percent growth in 2023-24, India exhibited a real growth rate of 8.2 percent. Notwithstanding the criticism around the Reserve Bank of India’s (RBI) optimistic view of India’s growth, their forecasts too fell short of the actual numbers. However, waves of pessimism struck again when the first quarter growth slowed down to 6.7 percent from last year’s 8.2 percent. To worsen the blow, the second quarter GDP estimates revealed that growth has slowed down to 5.4 percent, against last year’s 8.1 percent. Growth matters, but as the means and not an end in and of itself. This exposition delves into the Gross Domestic Product (GDP) figures by placing them in the context of other broad macroeconomic parameters.

While the International Monetary Fund (IMF) predicted a 6.5-6.7 percent growth in 2023-24, India exhibited a real growth rate of 8.2 percent.

The story behind the numbers

The second quarter of 2024-25 experienced the slowest growth in seven quarters, generating a wave of concern in the media. Before diving into criticism and calling for a systemic overhaul, it is necessary to analyse and identify the factors that have caused the slowdown. Table 1. shows that on the supply side, while the primary sector remained stagnant, manufacturing activities have significantly slowed down. On the other hand, services have recorded moderate growth over the last year. On the demand side, the performance of both government expenditure and investment has been underwhelming while consumption has picked up and delivered a 6-percent growth. There has been a slowdown in exports growth, but a shrinkage in overall imports.

Table 1: Growth Rate of GDP and its components (constant prices)

Source: MOSPI

Election season can explain a large portion of this seasonality in quarterly GDP. Infrastructural investment, and broadly, capital expenditure (capex), which played a crucial role in the growth process over the last few quarters, has been constrained due to electoral costs. This reflects a decline in government spending and investment, but steady consumption—transfer payments in the period leading up to elections aid consumption but are not directly accounted for in GDP estimation. Compared to the first half of 2023-24, total expenditure of the government has remained at the same level, while capex has been reduced by almost INR 80,000 crore. Despite higher revenues, the contraction in capex indicates inefficiency. Irrespective of what this is attributed to, elections or complacency due to a robust performance last year, capex needs to be amped up—over 60 percent of the budget estimates need to be met in the second half.

The manufacturing Purchasing Managers’ Index (PMI) recorded an eleventh-month low but provides insights which can be mapped onto overall economic growth.

On the production side of the economy, manufacturing seems to have subdued. The manufacturing Purchasing Managers’ Index (PMI) recorded an eleventh-month low but provides insights which can be mapped onto overall economic growth. Manufacturing performance is being impeded by strong competition and high prices. This is curbing domestic demand but has had an opposing effect on international demand, which showcased the best performance in four months. Factory employment has also increased, delineating that there is no cause for concern or urgent need for reforms. This is assured by the fact that manufacturing PMI and event production are above the long-run average. This is also the case for GDP, where the real output in this quarter is the second highest in the history of the nation.

Behind the numbers: More numbers

Looking only at GDP numbers can be misleading—other parameters like inflation, balance of payments and unemployment need to be considered. On the inflation front, average inflation for the April-September period in 2023-24 was around 4.8 percent. This has now elevated to 5.4 percent. The most glaring component of this change is the price level of vegetables—recording 42.18 percent inflation in October 2024. This has caused food and beverages inflation to be around 9.7 percent, causing uncertainty among households and businesses alike. The vegetable inflation can be attributed to seasonality in production, susceptibility of supply chains to extreme weather events, cornering of markets, and increased regional demand. While these can be offset by agricultural market reforms, hedging mechanisms and storage expansion, short-term remedies are needed to cool off the market.

The vegetable inflation can be attributed to seasonality in production, susceptibility of supply chains to extreme weather events, cornering of markets, and increased regional demand.

The external front of the country seems to be under control, with the Balance of Payments (BoP) deficit significantly reducing for the April-June period. However, owing to geopolitical uncertainty, and elections both in and outside India, Foreign Portfolio Investors (FPI) have been anxious and have pulled funds out of the country, affecting the domestic stock market. Foreign Direct Investment (FDI), which is a far better measure of foreign confidence, has recorded 45 percent growth in the first half of the year. This should entail an expansion in business activity in the second half, rejuvenating the manufacturing sector. Turning towards the current account, merchandise exports have increased by only 0.92 percent in the first half. Thus, the services sector continues to dominate in terms of exports. Despite the reduction in imports, given India’s little dependence on export-led growth, the current account alone cannot balance the effects of investment and government spending.

Table 2: Employment Indicators

Source: MOSPI

Jobs, a major cause of concern for Indian policymakers, have been faring well. The labour force participation rate (LFPR), has gone up at the macro level, across genders. Similarly, the unemployment rate (UR), has recorded a steady decline. More employment and less output—is it a paradox or spin doctoring? Neither. The economy is adjusting to the shift of surplus labour from agriculture to manufacturing and services. However, this labour is usually low-skilled and cannot immediately enhance industry productivity. This is where state intervention becomes necessary. Skilling and training to facilitate the transition from primary to secondary sectors is essential. This will not only increase the flow of labour but increase their efficiency in the destination sectors.

Concluding analysis

It is evident that growth has slowed down, but the intricacies reveal that this is not cause for concern. Many analysts have labelled this phenomenon as a textbook case of “stagflation”, where GDP declines despite rising inflation. This is not the case in India—GDP has grown but not at a rate which aligns with its goal of becoming “Viksit Bharat” by 2047. While geopolitical uncertainty, weather conditions, and global market changes have stymied the quarterly growth, the government needs to focus on magnifying capex in the second half. The inflation dilemma needs to be confronted by the RBI but as is the case with all monetary policy, timing is of the essence. Greater state efficiency and emphasis on free markets can stimulate productivity, moderating the inflation issue. The data does not call for systemic reforms, rather it highlights the need for efficiency in the current policies.

Arya Roy Bardhan is a Research Assistant with the Centre for New Economic Diplomacy at the Observer Research Foundation.

• Economics and Finance
• India
• capex
• capex
• Foreign Direct Investment
• GDP growth
• government expenditure
• government expenditure
• growth forecasts
• growth forecasts
• India
• inflation
• manufacturing slowdown
• manufacturing slowdown
• policy efficiency
• policy efficiency
• unemployment rate

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