Invigorating Economy A Big Challenge For Modi Govt As GDP Hits Slow Lane

The steep slowdown in the construction activity’s growth rate can be attributed to fall in property sales during July-Sept 2024. The fall was much steeper in Hyderabad real estate, which registered a whopping 42 per cent decline in housing sales during July-Sept this year. Rapid escalation of property prices is one of the key reasons for this decline. Regulatory issues also played spoilsport, but this phenomenon has been confined to the Hyderabad market. Whenever sales are down in the property market, new projects are put on hold, leading to less construction activity in this space

Is the Indian economy in a visible slow lane now? It appears to be so with the gross domestic product (GDP) plunging to more than a 21-month low of 5.4 per cent during July-September - the second quarter of the country’s financial year that begins on April 1. The Reserve Bank of India (RBI) projected a growth rate of seven per cent while economists estimated 6.5 per cent upswing for the quarter. But all the projections have gone terribly wrong!

The real growth rate came as a shocker as, at 5.4 per cent, it was more than two percentage points lower from RBI’s projection and over one percentage point lower than the optimism of economists. The growth rate was an exciting 8.1 per cent in the same period a year ago. Sequentially too, the GDP grew at a faster clip to hit a healthy 6.7 per cent in the first quarter-April-June 2024.

Sluggishness in manufacturing and mining has taken a big toll on the growth. The key manufacturing sector expanded by just 2.2 per cent compared to 14.3 per cent a year ago and seven per cent in the preceding three months. Running on similar lines, the mining sector contracted by 0.1 per cent from 11.1 per cent upswing a year ago and a growth of seven per cent during April-June.

Of course, there are other factors as well. Fall in consumption levels did its bit too. Consumption accounts for nearly 60 per cent of GDP. Studies carried out on list companies revealed that wages declined during the second quarter, a first in the post-Covid era. This coupled with elevated inflation forced households, especially the middle class, to cut down on spending. We now know the reason for the tepid manufacturing.

Well, is there any pattern to this slower economic growth? India clocked an economic growth rate of 8.6 per cent in Q3FY24 (October-December 2023). The growth rate declined to 7.6 per cent in Q4FY24 (January-March 2024). It fell further to 6.7 per cent in Q1FY25 (April-June 2024) before plunging to a low of 5.4 per cent in the second quarter. That means that the growth rate has been on a gradual decline for the past 12 months.

If this trend continues and turns into a cyclical slowdown, then the Indian economy will be subject to more pain. We will have more clarity on this when the next quarter GDP numbers are out. But one consolation is that India is still the world’s fastest growing major economy despite Q2 slump. In contrast, China, the second in the list, grew at 4.6 per cent in the same period.

Meanwhile, let’s focus on other key dampeners for the economy in the second quarter. Imports galloped in July-September, indicating dumps from overseas markets. According to official data, imports during the second quarter went up by 6.8 per cent against a de-growth (contraction) of five per cent in the same quarter a year ago. Production of crude oil also contracted by 3.4 per cent during the period as compared to 1.3 per cent upswing a year ago.

A more disturbing trend was witnessed in the sales of commercial vehicles, which fell by a staggering 11 per cent in this three-month period against a growth of 6.8 per cent in the same period last financial year. This obviously bodes ill for the economy in the long run.

Moreover, the construction sector proved to be another dampener. This segment, which falls under the secondary sector in the GDP matrix, registered a growth of 7.7 per cent, down from a high of 13.6 per cent a year ago. The steep slowdown in the segment’s growth rate can be attributed to a fall in property sales during the period. According to a report, housing sales in the second quarter fell by 11 per cent across major metros.

The fall was much steeper in Hyderabad real estate, which registered a whopping 42 per cent decline in housing sales during July-September this year. Rapid escalation of property prices is one of the key reasons for this decline. Regulatory issues also played spoilsport, but this phenomenon has been confined to the Hyderabad market. Whenever sales are down in the property market, new projects are put on hold, leading to less construction activity in this space.

But on the brighter side, agriculture was the saving grace this time around. Agriculture, livestock, forestry and fishing segments clocked 3.5 per cent upswing in the second quarter against 1.7 per cent a year ago and 2 per cent in the preceding quarter. Adequate rainfall did the trick here. This is a good sign indeed as it keeps the rural economy in a healthy zone.

However, a slowdown in economic growth will invariably have a cascading effect. It primarily reduces the number of new employment opportunities. That’s not good for the country as well as the ruling dispensation.

Chief Economic Advisor Dr. V. Anantha Nageswaran, who expressed disappointment at the lower Q2 GDP growth, underlined the need for more economic reforms to accelerate growth. But, given the political constraints that Prime Minister Narendra Modi faces in the wake of BJP’s reduced tally in the Lok Sabha and his dependence on allies for survival, it is not easy for him to push game-changing economic reforms through. Though Modi and BJP, the party he represents, got a big political boost with thumping wins in Haryana and Maharashtra, lower count in the Lok Sabha still weighs.

Added to that, the RBI may not relish the prospect of cutting interest rates at this juncture to fuel growth as inflation is at elevated levels. Will the Modi government convince him for a rate cut?

Moreover, Modi is now into his third term as the Prime Minister. There is some kind of complacency in the administration and political leadership as well. The Modi government should devise new plans to encourage the entire machinery to overcome complacency and put the country on a higher growth path.

However, that is easier said than done. So, invigorating the economy is a big challenge for the Modi government as GDP growth is on a decline now!

But it should find a way out as higher growth is the key for achieving Viksit Bharat.