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India's economic growth has slowed significantly, reaching a four-year low of 6.4% in the current financial year (FY25), according to the National Statistics Office (NSO). This figure falls short of both the Reserve Bank of India's (RBI) projection of 6.6% and the government's estimate of 6.5-7%. The primary drivers behind this deceleration are weak industrial performance and sluggish investment. The NSO's advance estimates, based on data from the first seven to eight months of FY25, serve as crucial input for formulating the Union Budget. This early release allows the Ministry of Finance and other government departments to prepare for the upcoming budget presentation in Parliament. The discrepancy between the projected and actual GDP growth underscores the challenges facing the Indian economy.
A closer examination of the data reveals a concerning trend. While the GDP growth rate is expected to improve in the second half of the financial year (H2), the weakness experienced in the first half (H1) significantly impacts the overall annual growth. Back-of-the-envelope calculations indicate a growth rate of 6.7% for H2, compared to 6.0% in H1. This disparity highlights the uneven nature of economic recovery. The previous GDP data release in November 2024 showed a seven-quarter low of 5.4% growth in July-September 2024, primarily due to subdued manufacturing and mining sectors. This trend of slowing growth confirms a wider pattern of economic contraction. The substantial decrease in manufacturing and mining clearly demonstrates the deep problems within the economy's production sectors.
The slowdown extends across various sectors of the Indian economy. The primary and secondary sectors, excluding agriculture, have experienced a significant deceleration. Experts attribute this slowdown to a cyclical downturn, compounded by other factors. These factors include a strong base effect from previous years, the impact of general elections, weak private sector capital expenditure (capex), and the effects of monetary and fiscal tightening measures implemented by the government. Paras Jasrai, a Senior Economic Analyst at India Ratings and Research, points to this cyclical slowdown and the additional contributing factors, explaining the lower than anticipated GDP growth. The significant drop in manufacturing GVA growth from 9.9% in FY24 to an estimated 5.3% in FY25 is particularly alarming, illustrating the depth of the manufacturing slump. Similarly, mining and quarrying growth has fallen drastically, suggesting a broad-based slowdown impacting production.
While some sectors show signs of resilience, the overall picture remains subdued. The services sector is performing relatively better, with an estimated growth of 7.2% in FY25, driven largely by the 'Public administration, defence & other services' sector. However, other service sectors such as ‘Trade, hotels, transport, communication & broadcasting services’ and ‘Financial, real estate & professional services’ are experiencing slower growth compared to the previous year. This indicates a sector-specific weakness within the service industry, limiting the overall positive impact on GDP growth. The agricultural sector shows a positive trend, with real GVA growth projected at 3.8% in FY25, up from 1.4% in FY24. However, this positive growth is insufficient to offset the declines in other sectors. The contrast between the strong performance of the public sector and lagging private investment highlights fundamental structural issues within the economy.
Consumption, while higher than the previous year, hasn't been enough to compensate for the sluggish investment. Private Final Consumption Expenditure (PFCE) is projected to grow at 7.3% in FY25 compared to 4.0% in FY24, indicating increased consumer spending. However, Gross Fixed Capital Formation (GFCF), an indicator of investment, is expected to grow by only 6.4% in FY25 compared to 9.0% in FY24. This weak investment significantly hampers overall economic growth. The government has tried to stimulate the economy through increased expenditure. Government Final Consumption Expenditure (GFCE) is projected to increase to 4.1% in FY25 compared to 2.5% in FY24. However, this government intervention hasn't been enough to counteract the broader economic decline, suggesting a need for more comprehensive and targeted policies to address the systemic issues contributing to the slowing growth. This dependence on government spending to support overall growth raises concerns about long-term economic sustainability and dependence on fiscal policy.
The subdued growth in FY25 presents significant challenges for the Indian economy. The combination of weak manufacturing, sluggish investment, and a cyclical slowdown necessitates a comprehensive policy response. The government needs to address the underlying structural issues hindering private sector investment, encourage innovation and technological advancements in manufacturing, and create a business-friendly environment to attract both domestic and foreign investment. Furthermore, measures to enhance consumer confidence and boost demand are essential for stimulating broader economic activity. The upcoming Union Budget will play a crucial role in shaping the government's response to these challenges. The government will need to create policy interventions that address the underlying causes of the slowdown rather than relying solely on short-term fiscal measures. Ultimately, sustainable economic growth will require a multi-pronged approach encompassing structural reforms, regulatory improvements, and strategic investments in key sectors. The success of these measures will determine the trajectory of India's economic growth in the coming years.
Source: GDP growth seen at 4-year low of 6.4% on weak manufacturing, slow investment