'Act Now': Policy lessons from Q2's 5.4% GDP growth

Moneycontrol spoke to Dk Srivastava, Chief Policy Advisor, EY India; Gaura Sengupta, IDFC First Bank; and Dhiraj Nim from ANZ Bank on India's Q2 GDP

The Government of India needs to step up spending to reverse the dawdling GDP growth rate of 5.4 percent seen in the second quarter of the current financial year. A rosier second half in FY25 would hinge on more infrastructure as well as revenue spending to boost demand in the economy, economists say.

The Centre's and consolidated state capex fell by 15 percent and 11 percent, respectively, in the first half of the current financial year.

India’s Q2 GDP print, the lowest in seven quarters, came on the back of a contraction in mining growth to a 24-month low and muted manufacturing and utility services.

"Infrastructure spending will remain the main driver of growth in the medium term since global conditions remain subdued. There is a need for policymakers to become aggressive so that the slippage from the budgeted investment spending is not excessive to spur demand in the economy," said DK Srivastava, Chief Policy Advisor, EY India.

Both capital expenditure and revenue expenditure have to be pushed up to the budgeted growth levels, Srivastava added.

The government has pegged growth at 6.5-7 percent for the year.

Gaura Sengupta of IDFC First Bank seconded the view on ramping up expenditure both at the central and state levels.

"The demand component is missing...urban consumption is weakening, there is hope that rural demand will pick up when the harvest comes in but that is a second-half story. Private sector capex is tentative in adding fresh capacities unless there is visibility on demand. In such a scenario, the government has to continue supporting capex," she said.

After accelerating to a seven-quarter high of 7.4 percent in Q1 FY25, private final consumption expenditure (PFCE) slowed to 6.0 percent during July-September. PFCE is a key indicator to measure spending by households.

According to Dhiraj Nim from ANZ Bank, expectations have been broadly set when it comes to public expenditure with a tighter fiscal deficit of 4.9 percent of GDP for FY25.

"I would not advocate that fiscal largesse should be a path that is adopted to support growth. If the governments should exhaust their budgeted limits on spending, both Centre and states, that should be enough," Nim said.

Sengupta and Srivastava agreed that the government should focus on spending their budgeted allocations, instead of bettering the fiscal deficit target for the current fiscal.

Capex spending remains muted, with government spending at 42 percent of the budgeted Rs 11.11 lakh crore, compared with 54.7 percent spent during the April-October period last fiscal.

However, fiscal deficit, at 46.5 percent of the Budget until October, was higher than the previous year’s 45 percent for the same period.

Not just fiscal consolidation, but elevated interest rates too are seemingly weighing on GDP growth this fiscal.

"In the current scenario, slightly affordable policy rates may be a small support to the economy," Nim said.

Sengupta echoed this take and said that it may be time for the central bank to shift its focus on growth to an extent and lower its hawkish attention on inflation.

Recently, union ministers Piyush Goyal and Nirmala Sitharaman highlighted the need for cheaper bank rates, with the former directly asking the central bank to cut rates.

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has kept the repo rate unchanged since February 2023 due to persistent food inflation.

Retail inflation in October rose to 6.2 percent, the highest in 14 months and above the MPC's target range of 2-6 percent.