India's GDP growth slumps to four-year low of 6.4%

India's GDP growth slumps to four-year low of 6.4%
  • India's GDP growth hits four-year low of 6.4%.
  • Weak manufacturing and investment caused the slowdown.
  • Economic slowdown predicted by economists is underway.

India's economic performance in the current financial year (FY25) has fallen short of expectations, registering a four-year low GDP growth rate of 6.4%. This significant deceleration, as revealed by the National Statistics Office (NSO)'s first advance estimates, is primarily attributed to the underperformance of the industrial and investment sectors. The figure falls below both the Reserve Bank of India's (RBI) projection of 6.6% and the government's own estimate of 6.5-7% growth outlined in the Economic Survey 2023-24. This unexpectedly low growth underscores a concerning trend in the Indian economy, raising questions about the effectiveness of current economic policies and the resilience of various sectors to both domestic and global economic pressures. The implications of this subdued growth extend beyond immediate financial concerns, impacting employment, investment confidence, and the overall trajectory of India's economic development.

The NSO's advance estimates, based on data from the first seven to eight months of FY25, serve as a crucial input for the Union Ministry of Finance in formulating the upcoming Union Budget. The early release aims to provide sufficient time for comprehensive analysis and informed decision-making. The methodology employed involves extrapolation of existing data, which inherently introduces a degree of uncertainty. However, these initial assessments are pivotal in shaping fiscal policies for the following year. It is important to note that while these preliminary figures offer valuable insights, they are subject to revision as more complete data becomes available. Revisions are common in economic forecasting, and it is crucial to remain cautious about the definitive nature of these initial estimates. The need for further analysis is highlighted by the discrepancy between the initial estimates and prior predictions.

A detailed sector-wise analysis reveals the specific contributors to the overall slowdown. The manufacturing sector, a key driver of economic growth, experienced a sharp decline, with GVA growth plummeting to 5.3% in 2024-25 from 9.9% in the previous year. Similarly, the mining and quarrying sector exhibited a significant contraction, registering a mere 2.9% growth compared to 7.1% in FY24. These figures highlight the vulnerability of these sectors to both cyclical economic fluctuations and potentially other underlying structural issues requiring attention. The construction sector, while still showing positive growth at 8.6%, also experienced a slowdown compared to the previous year's 9.9% growth. These specific sector declines clearly illustrate the uneven nature of the slowdown, with some sectors more heavily impacted than others. Further investigation into the causes of this sector-specific weakness is necessary to develop effective policy interventions.

In contrast to the underperformance of the primary and secondary sectors, the agricultural and allied sectors demonstrated more resilience. Real GVA growth in this sector is projected to increase to 3.8% in FY25, a significant improvement from the 1.4% growth observed in FY24. This positive performance reflects the relative stability and resilience of the agricultural sector, suggesting a degree of decoupling from the broader economic slowdown. However, the overall picture remains one of subdued growth, and the relative strength of the agricultural sector cannot completely offset the weakness in other key sectors. The services sector also contributed to the overall GDP growth, though at a slower pace than in the previous year. While the 'Public administration, defence & other services' sector performed relatively well with 9.1% growth, other service sectors showed moderate deceleration.

The decline in GDP growth is not solely attributed to weak performance in the manufacturing and mining sectors. Economists have highlighted several contributing factors, including a strong base effect, the impact of general elections, weak private sector capital expenditure (capex), and the effects of monetary and fiscal tightening. The strong base effect refers to the fact that the economy was performing relatively well in the previous year, making it more challenging to achieve the same level of growth in the current year. The general elections may have created uncertainty and potentially delayed investment decisions. Weak private sector capex reflects a lack of confidence among businesses regarding future prospects, and this hesitation to invest is a significant drag on growth. Monetary and fiscal tightening, implemented to curb inflation, while necessary to maintain macroeconomic stability, has had the unintended consequence of slowing economic activity.

The impact of these factors is reflected in the data. Private Final Consumption Expenditure (PFCE), an indicator of consumer demand, showed an increase to 7.3% growth compared to 4.0% in FY24, indicating sustained consumption. However, investment, as measured by Gross Fixed Capital Formation (GFCF), experienced a slowdown, growing at 6.4% compared to 9.0% in the previous year. This subdued investment is a major contributor to the lower-than-expected overall GDP growth. It's crucial to understand that sustained economic growth requires not just consumption but also substantial investment, both in terms of infrastructure development and private sector expansion. The current data highlights a clear imbalance in this crucial area. Government expenditure, while higher than the previous year at 4.1% growth compared to 2.5%, still couldn't offset the slump in private investment and other sectors.

Looking ahead, the Indian economy faces significant challenges. While the second half of the financial year showed some signs of recovery, the overall impact of the first half's slump remains significant. The government needs to adopt comprehensive strategies to boost investment, address sector-specific weaknesses, and foster a more robust and inclusive growth pattern. Policymakers need to carefully consider measures to improve the business climate, incentivize private investment, and mitigate the negative consequences of monetary and fiscal tightening. The focus should be on addressing the structural issues limiting economic growth rather than relying solely on short-term measures. Sustained and inclusive economic growth requires a long-term vision and a holistic approach that accounts for the complexities of the Indian economy and its evolving needs.

Source: GDP growth seen at 4-year low of 6.4% on weak manufacturing, slow investment

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