Sharp slowdown in India’s economic growth

Source: The post sharp slowdown in India’s economic growth has been created, based on the article “Express view: RBI’s dilemma— with low growth, narrowing choices” published in “Indian Express” and the article “Deregulation, reforms key to spur growth: CEA Nageswaran” published in “Live mint” on 30th November 2024

UPSC Syllabus Topic: GS Paper3- Economy-Growth

Context: The article discusses India’s economic slowdown in the second quarter of the fiscal year 2024-2025 (FY25). GDP growth fell to 5.4%, below expectations. Key sectors like manufacturing and construction slowed, and urban demand weakened. Reasons include high inflation, global factors, and excess rainfall. However, stronger rural demand and increased government spending may boost growth in the year’s second half. Sharp slowdown in India’s economic growth.

What is the Current State of Economic Growth?

1. India’s GDP growth slowed by 270 basis points year-on-year to 5.4% in Q2 FY25, below the 6.5% forecast.
2. Sequentially, GDP growth eased by 130 basis points from 6.7% in Q1.
3. GVA grew 5.6% in Q2, down from 7.7% in the same period last year and 6.8% in Q1.

What factors impacted growth?

1. Domestic Factors:
2. Urban Demand Slowdown: Urban demand declined due to high food inflation and subdued real wage growth, as highlighted by the finance ministry.
3. Rainfall Effects: Excess rainfall reduced footfalls, impacting urban activity.
4. Private Consumption Weakness: Lower private demand further weakened growth momentum.
5. Sectoral Slowdown:
6. Mining sector has contracted.
7. Manufacturing grew only by 2.2%, a significant drop from 7% in the prior quarter.
8. Construction and utilities (electricity, gas, and water supply) have also slowed down.
9. Services such as finance, real estate, and professional services are growing more slowly.
10. Global Factors:
11. Global Factors: Import dumping and excess global manufacturing capacity impacted growth, as noted by V. Anantha Nageswaran.
12. Geopolitical Uncertainty: Risks surrounding the US presidential election heightened economic uncertainties.

What measures did the Chief Economic Adviser recommend?

1. Deregulation: Focus on reducing regulatory burdens to improve business efficiency and growth.
2. Structural Reforms: Prioritize long-term reforms to address domestic economic challenges.
3. Strengthen Public Investment: Shift expenditure from revenue to long-term growth-oriented investments.
4. Reassess Hiring Practices: Review hiring and compensation models in the private sector for better workforce management.
5. Address Barriers to Capital Formation: Examine impediments like excessive rainfall and election uncertainties.
6. Boost Manufacturing: Tackle issues like stagnant steel production despite rising consumption.

What are the projections for future growth?

1. India remains one of the fastest-growing economies. Growth is expected to rebound in the second half of FY25, driven by stronger rural demand after a good monsoon and harvest, as well as increased government spending.
2. The finance ministry anticipates higher capital expenditure in the coming months.

Question for practice:

Examine how the Chief Economic Adviser’s recommendations aim to counteract the factors contributing to India’s economic slowdown.