Structural factors may have contributed to a slowdown in India's GDP growth in the first half of the current fiscal, the finance ministry said on December 26, adding that a combination of monetary policy stance and macroprudential measures by the central bank could have contributed to the demand slowdown.
The central bank kept the repo rate unchanged in 2024 at 6.5 percent, though it shifted its stance from 'withdrawal of accommodation' to 'neutral' in the October policy.
Hiring and compensation practices in the corporate sector have also played their part in slowing urban consumption growth, the finance ministry added in its monthly economic review for November 2024.
India’s real GDP grew 5.4 percent during Q2 of FY25 and 6 percent for H1 of FY25. The slowdown in growth was primarily concentrated in some manufacturing sections compared to the previous quarter.
When it comes to consumption, rural demand has been trending higher than its urban counterpart.
Several high-frequency indicators, including sales of personal vehicles and fast-moving consumer goods (FMCGs), credit growth as well as fuel usage have been pointing at a more pronounced slowdown in urban consumption.
As per data from Federation of Automobile Dealers Associations (FADA), In the two-wheeler segment, sales in rural markets sharply rose by 19.93 percent YoY in November 2024, while in urban areas, it was at a much lower 9.08 percent. A similar trend was seen in passenger vehicles as well.
In fact, after accelerating to a seven-quarter high of 7.4 percent in Q1 FY25, Private Final Consumption Expenditure or PFCE, slowed down to 6 percent during July-September. PFCE is a key indicator to measure spending incurred by households.
In its monthly economic review for November 2024, the ministry said given signs of a pick up in urban depend and expectations of food prices easing going ahead, there are good reasons to believe that the outlook for growth in H2 of FY25 is better than what we have seen in the first half of the current fiscal.
The RBI has projected CPI inflation at 4.8 percent for FY25, with Q3 at 5.7 percent and Q4 at 4.5 percent.
"The farm sector outlook is optimistic, generating hopes that food price pressures will decline gradually," according to the review.
The finance ministry acknowledged the Reserve Bank of India's decision to lower the cash reserve ratio from 4.5 percent to 4 percent in its policy meeting in December 2024.
"That should help boost credit growth, which has slowed a little too much and quickly in FY25," the ministry said in its review.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
