India's economic growth has slipped to 5.4% for the second quarter of fiscal year 2024-2025, marking its slowest rate since the third quarter of 2022 and falling short of analysts' expectations. This downturn reflects significant challenges within the manufacturing sector and diminished consumer spending, particularly among urban populations. The slowdown has raised concerns about the stability and resilience of the Indian economy as it positions itself amid global uncertainties.
The latest figures, released on November 29, 2024, show the gross domestic product (GDP) growth decelerated sharply from 6.7% recorded in the previous quarter. The expectations had been for the GDP to grow around 6.5%, according to recent forecasts. Analysts from various sectors have noted the downturn as indicative of broader economic struggles, particularly with respect to household consumption, which accounts for approximately 60% of the nation's GDP.
According to Kunal Kundu, an economist at Societe Generale, the weakening economic activity has become evident, especially through high-frequency data indicating significantly subdued domestic consumption. He pointed out, "The slowdown is getting reflected in the GDP data, with rising inflation compounding the pain for consumers. Last year's artificially elevated growth was due to unusually low deflators, which are no longer applicable."
Harry Chambers, assistant economist at Capital Economics, elaborated on the projections for upcoming quarters, stating, "We expect growth to remain subdued as household consumption slows down and investment growth eases amid high interest rates; nevertheless, it’s important to note the economy isn’t heading for collapse." He suggested it would likely take until April for the Reserve Bank of India (RBI) to pivot to easier monetary policy, depending on inflation trends.
Urban consumption has noticeably contracted over the last few months. Observations made by Madhavi Arora, lead economist at Emkay Global, indicated the urban sector is experiencing lowered income capacity, which has adversely influenced their consumption habits. She stated, "The last few months have seen a pronounced drop across both durable and non-durable item purchases, contributing to weaker corporate profits for major firms like Maruti Suzuki and Hindustan Unilever." This overall reduction is anticipated along with rising commodity prices, which have been outlined as major pressure points on the economy.
Despite this downturn, the Indian government has emphasized continued confidence in recovery driven by rural demand and increased public spending. The agriculture sector, which demonstrated resilience with an approximate growth rate of 3.5%, is expected to contribute positively as it helps bolster rural consumption.
The government aims to recover momentum by consolidatively fostering growth public sector projects and expediting capital expenditures, particularly following commendable monsoon seasons which positively influenced rural agricultural output. "There’s been marked government spending since September which we expect will uplift the GDP growth significantly as we move forward," articulated Vineet Agarwal, managing director of Transport Corporation of India Ltd.
Some analysts remain hopeful about growth prospects, anticipating improved rural demand combined with enhanced capital projects might yield positive numbers for the latter part of the fiscal year. "We remain cautiously optimistic about the second half of FY25 as agriculture thrives and public spending tends to rise, especially during this festive season," stated Sujan Hajra, chief economist at Anand Rathi Shares and Stock Brokers.
The interconnectedness between domestic production and international factors has also raised eyebrows. Chief Economic Advisor V. Anantha Nageswaran pointed to unexpected issues stemming from Chinese under-recovery and geopolitical uncertainties which have sparked volatility and raised production costs. He stated, "The global environment is challenging our domestic manufacturing and prices, adding more complexity to the situation. Festivities may boost demand temporarily, but structural issues really matter here."
Despite resilient sectors such as construction and agriculture, the manufacturing numbers have been dented, dropping to mere 2.2% year-over-year growth, compared to 7% growth from the previous quarter. Upasna Bhardwaj, economist at Kotak Mahindra Bank, noted, "The manufacturing sector appears to have taken the maximum beating, indicating the need for strategic governmental and corporate interventions to spur real growth."
Real GDP for the second quarter stood at ₹44.10 lakh crore, as opposed to ₹41.86 lakh crore around the same time last year. The nominal adjustments upheld growth as well, as the overall consumption expenditure recorded significant proportions across the board. Amidst this fluctuated economic activity, public administration reported the fastest growth rate at 9.2% followed by construction's 7.7%. This rising public consumption in terms of infrastructure alongside capital input is expected to stimulate economic improvement.
Nevertheless, cautious anticipation looms as economists ponder future investment prospects as many currently high manufacturing costs and lack of private sector engagement pose substantial threats. "Where capital expenditure is concerned, optimism is prevalent; yet challenges persist with manufacturers struggling under current market conditions, which will likely temper overall performance," stated Garima Kapoor, economist at Elara Securities.
Reflecting on the immediate future, many are analyzing available data to assess potential improvements. Broader indicators have shown slight increases following steep declines; production indices for manufacturing and services experienced notable upticks from previous months, potentially signaling the onset of recovery, driven by festive demands and holiday spending. The PMI for manufacturing jumped to 57.5, illustrating rising orders, signifying optimism for boosted output moving forward.
Overall, as India continues to navigate this economic turbulence, spotlight remains on both urban consumption patterns and manufacturing output dynamics, with strategic governmental intercessions necessary for maintaining growth momentum. The road to recovery might be marked by painstaking adjustments, yet the second half of the fiscal year promises renewed strength through improvements owed to agricultural efficacy and steady public directives.
