Moneycontrol Pro Panorama | Growth worries persist

Growth in fresh investments and manufacturing has likely slowed.

Dear Reader,

After the sharp downtrend in the Q2 GDP numbers to 5.4 percent, all projections for full-year GDP growth point to slower growth in FY25. The RBI had forecast 6.6 percent growth, the government projected 6.5 percent while the National Statistical Office (NSO) has now lowered it further to 6.4 percent. 

On January 7, the first advance estimates released by the government showed that India’s growth is set to moderate to 6.4 percent in fiscal year 2025. If this turns out to be true, it will be the lowest level in four years.

No consumption slowdown?

The estimates however show that private consumption is bearing up well. Growth in private consumption spending for the full year is pegged at 7.3 percent, with the second half at 7.8 percent. Private consumption, therefore, is expected to recover smartly and will drive overall growth, perhaps on the back of a good harvest and lower inflation, if the NSO’s estimates are correct.

The surprising fact is that this is contradictory to what Q2 corporate results suggested about a consumption slump. The second quarter earnings results of the corporations suggested a widespread slowdown in consumption suggesting a demand slowdown. The equity markets too are worried about a growth slowdown.

A Bank of America Global Research note points out that this is the slowest pace of growth since the pandemic and the economy is now reversing the gains made in recovering lost output. Furthermore, this slowdown will have significant ramifications for consumer and business confidence, wage growth, corporate revenues, consumption, investment, credit demand, and, most importantly, fiscal arithmetic.

Several factors are at play: Growth in fresh investments and manufacturing has likely slowed. The credit squeeze from the banking sector due to the RBI’s restrictive policies has impacted demand.

The problem with slowing growth is that it triggers a vicious cycle. It dampens household demand, forces companies to cut production, and prompts banks to lend less. If this persists, asset quality concerns will arise — a scenario no banker wants to face.

From a policy standpoint, slowing growth increases the pressure on the central bank to cut rates. There is already a growing clamour for rate cuts following the dismal second-quarter GDP numbers, and this will only intensify.

Interest rates must come down now to spur demand. If growth continues to be sacrificed in pursuit of optimal inflation levels, the repercussions for the economy will be severe. The central bank will struggle to justify its lack of sensitivity to growth concerns in its press conferences.

It’s not a one-sided effort. The government must also rethink ways to reinvigorate the investment drive. Ramping up investments is crucial. Reducing the tax burden on the middle class is equally important to restore confidence in the economy. Gross fixed capital formation is at a 3-year low.

Likely revisions in February? 

However, the first advance estimates should be taken with a pinch of salt. These figures are based on data available until November and are prone to significant revisions, according to Madhavi Arora, an economist at Emkay Global Financial Services.

“The 1st advance estimate has a short shelf-life, as the 2nd advance estimate will be released by the end of February along with Q3 data. The NSO will also publish revised estimates of national accounts for the last three years by January-end, which will change the base year data as well,” says Arora.  Let’s see what happens then.

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