The consensus expectation stood at about 6.5% and the Reserve Bank of India (RBI) was expecting around 7% growth till its October policy, only to pare it to 6.8%. Growth in gross value added (GVA), which is the preferred measure of economists to gauge the economy’s momentum, at 5.6% was a tad better (even if a seven-quarter low).
Core GVA, which strips out more volatile components such as agriculture and thus is a broader and better measure of private-sector growth, stood at a mere 4.3%, capturing the intensity of the slowdown. Even nominal GDP growth slowed to 8% year-on-year in the latest quarter, the weakest since covid.
Given the budget’s 10.5% nominal growth assumption for 2024-25, any undershoot could also hurt India’s fiscal accounts. Yet, with this sort of a shocker, a peculiar logic may take hold too: ‘What’s bad is good.’ This may seem like yet another example that challenges the tradition of economics which assumes all economic agents as rational, but read on.
The first thing a shocker does is make everyone, including policymakers, sit up and take notice. It then forces an assessment that prompts corrective action and hence the ‘bad news is good’ thinking.
Why did growth slow down so dramatically? True, the world today is a fraught and uncertain place, but a large part of the slowdown (bar private capital expenditure) seems to be influenced by domestic factors.
Several experts have been pointing out that the government taking its foot off the accelerator of expenditure growth while the central bank’s foot was on the brakes by way of a tight-money policy, combined with a slew of macro prudential measures, was bound to hurt growth.
Fiscal spending that slowed expectedly in the first quarter of 2024-25 owing to the Lok Sabha elections did not reaccelerate at the desired pace in the second quarter. Most forecasters expected second-quarter growth to be only slightly weaker than in the first. Agriculture growth was also seen to be strengthening after a sluggish performance.
Government capital expenditure spending contracted about 15% year-on-year in the first half of 2024-25, while revenue expenditure grew 8.6%, leading to overall expenditure growth of a mere 3.3%.
Overall investment growth (gross fixed capital formation, or GFCF, stood at 5.4% versus 7.5% in the first quarter) also moderated, as government capital expenditure spending tracked lower (37.3% of the Budget Estimate in the first half of 2024-25) compared to last year (49%).
Not surprisingly, both investment and consumption dragged down GDP growth. Growth in consumption, which accounts for over 58% of GDP, slowed to 6% from 7.5% in the first quarter.
Urban demand was hurt in part due to a moderation in leveraged consumption, visible in lower growth of unsecured retail lending on account of RBI’s macro-prudential measures, soaring food inflation that squeezed disposable incomes and the lingering impact of slow hiring in some sectors.
For RBI’s 7.2% target for 2024-25 to be achieved, growth in the second half will have to clock 8%-plus. The good news is that the policy levers needed are largely internal.
First, it will have to be the fiscal arm that must unclog the spending spigots. It will have to double down on its capital expenditure and spend at a run rate of about ₹1.17 trillion per month for the rest of 2024-25. It can do so by its own version of OMOs (‘open mouth operations’) by way of directives to various ministries and departments to raise spending.
It can also nudge states that need to spend about ₹90,000 crore per month and to use their ₹1.5 trillion interest-free capital expenditure loans. To be fair, the government has already started spending, as seen in its cash balances with RBI being run down. Revenue expenditure shot up 42% year-on-year in October.
Reassuringly, select high frequency indicators are holding up. Higher kharif output and brighter prospects of rabi combined with the impact of government activity will spur rural demand and discretionary spending. The marriage season on the heels of a satisfactory festive season should also record gains from dismal third -quarter numbers.
As for monetary policy, RBI faces ‘poor optics’ if it cuts rates now when its own 2024-25 GDP forecast is at 7.2% and the last inflation print was 6.2%, given that it did not cut when inflation was under 4% a few months ago. RBI can now be expected to lower its GDP forecast.
It will also help to sound slightly dovish by giving growth concerns due weightage in its upcoming policy statement. Infusing more liquidity by way of a cash reserve ratio cut (a 50 basis points cut could provide about ₹113,000 crore), variable rate repo auctions or open market operations would also help.
It could allow gradual rupee depreciation to spur exports and mull cutting the repo rate between now and its February meeting if growth doesn’t revive or vegetable inflation cools fast.
A coordinated and unwavering fiscal-monetary tango that has held India in good stead in the past could do the trick yet again and provide a back-ended fillip to growth going forward.
These are the author’s personal views.
The author is group chief economist at Larsen & Toubro.
