Latest Real GDP Growth Figures Call For Acceleration With New Drivers

There is a need to bring more reforms both at the central and state levels, better ease of doing business, speedy clearances and bringing in more sectors to attract higher FDI investments

The data released by the Union Ministry of Statistics and Programme Implementation on real GDP on November 29 has come as a surprise for the market as it way below estimations, despite the fact that a slowdown in growth rate was expected.

It is quite a surprise as real growth rate has been estimated to grow by 5.4 per cent in Q2 of FY 2024-25 as against the corresponding period growth rate of 8.1 per cent in 2023-24. This growth rate of 5.4 per cent is a seven-quarter low since October- December 2023.

The latest low growth will have an impact on the overall growth for the full year unless there is an acceleration in the subsequent two quarters as the government is estimating 6.5 per cent growth for 2024-25 whereas the Reserve Bank of India (RBI) has estimated real GDP growth rate of 7.2 per cent for 2024-25 and its estimation for Q3 is at 7.4 per cent and for 7.4 per cent for Q4.

Is the lower real GDP growth just one instance or does it mark the beginning of a new trend, wondered chief economist V. Anantha Nageshwaran. He remarked that the Q2 growth is quite ‘disappointing’ but the 6.5 per cent GDP target for F25 is ‘not in danger’.

This dip in real GDP has been mainly due to substantial fall in manufacturing sector, whose growth rate of 2.2 per cent is much lower than the seven per cent for the last quarter and 14.3 per cent for the corresponding quarter of the previous year. This slump is due to lesser urban demand and lower capacity utilisation. There is also the risk of dumping of imported goods, particularly steel material. According to Nageshwaran, while steel production has increased, the consumption levels have not gone up. The international trade and demand for Indian manufactured goods are also volatile due to the geo political conditions that continue to impact supply chains, domestic inflation and incoming capital flows.

An increase in consumption full capacity utilisation of manufacturing capacity is essential to attract new capital investments, including from the private sector. The moot point is that the central and state government cannot lead in capital expenditure even though the Centre has kept ambitions target for capex expenditure for this year.

The private sector's capital expenditure (capex) in the first half of FY24 was Rs. 6.11 lakh crore, which is a 34 per cent decrease from the same period in the previous year. The private sector's share in total capex announcements was 71 per cent, slightly lower than the 73.4 per cent share last fiscal.

Apart from manufacturing, mining had a negative growth of 0.1 per cent as against 7.2 per cent in the last quarter and 11.1 per cent in the corresponding period of the previous year. Electricity, gas, water supply and other utility services also had a lower growth, while the construction sector has shown a downward trend from 10.5 per cent in the first quarter of this year to 7.7 per cent.

Amid this, it is gratifying that agriculture has regained its contribution to real GDP by registering a growth of 3.5 per cent in Q2 this year as against the last quarter’s 2.7 per cent.

It is worrying that exports growth has come down substantially this quarter at 2.8 per cent as against 8.7 per cent in the first quarter. A good augury is that in the current global uncertainties, India is still doing better in exports and having diversified into new countries, it should be able to do better in global exports.

While real GDP growth for Q2 has slowed down, the latest CPI inflation as of October 2024 is at 6.2 per cent, which is much higher than the RBI target rate of six per cent and even though increase in inflation was expected, the current CPI inflation is much higher due to high food inflation, whose inclusion did cause concern even though core inflation has moderated. The pressure on RBI to reduce repo rate has been higher.

The core sector growth has shown improvement at 3.1 per cent in October as against 2.4 per cent in September after the 22-month low contraction of 0.1 per cent in August. However, the 3.4 per cent core output growth is sharply lower than the 12.7 per cent from a year ago.

Going by the prevailing situation, it is imperative that there is an absolute need to look fresh drivers to bolster growth and also provide an enhanced momentum. This can be achieved by liberal policy support, while removing hurdles for enhanced capital formation. There is a need to bring more reforms both at the central and state levels, better ease of doing business, speedy clearances and bringing more sectors to attract higher FDI investments.

We have to collectively halt the slow growth and both public and private sector should drive the high GDP growth to realise the vision of Viksit Bharath by 2047. The thrust should be on deregulation, reforms and providing better environment for growth. A good development is that agriculture is expected to pick up further on the back of the good growth registered in Q2. One can be optimistic that there is still a possibility of a full year growth that is beyond 6.5 per cent.

(The author is former Chairman & Managing Director of Indian Overseas Bank)