Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal have been ardent supporters of rate cuts, which RBI Governor Shaktikanta Das strongly opposes. Das argues that consumer inflation must fall steadily to the desired 4 percent level before any rate cuts can be considered.
India’s Q2 GDP Growth Dips to 5.4%, Raising Expectations for RBI Rate Cuts
India’s GDP growth in the second quarter fell to a nearly two-year low of 5.4%, owing primarily to underperformance in manufacturing, mining, and sluggish consumer spending. However, agriculture and construction remain the only bright spots in an otherwise lackluster economy.
This slowdown is expected to put more pressure on the Reserve Bank of India (RBI) to contemplate rate cuts at its December meeting. However, policymakers will need to strike a cautious balance between the mounting calls for rate cuts from the government and industry and the need to control inflation, which has already risen beyond 6.2%.
Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal have been the government’s cheerleaders in requesting a rate decrease, which has been strongly opposed by RBI Governor Shaktikanta Das, who wants consumer inflation to fall to the targeted 4% on a long-term basis.
The growth rate is significantly lower than the 8.1 percent increase recorded in the July-September quarter of 2023-24 and the 6.7 percent growth in the previous quarter of current fiscal.
India‘s GDP growth rate in the second quarter dropped to 5.4%, the lowest in over two years. This represents a considerable decrease from the 4.3% observed in the October-December quarter of 2022-23. The Reserve Bank of India (RBI) had forecasted 7% growth in Q2, but the actual performance was worse, owing primarily to slow manufacturing, mining, and consumer expenditure.
Private final consumption expenditure, a crucial indicator of consumer spending, increased by 6% in the September quarter, down from 7.4% the previous quarter. The manufacturing sector had a dramatic downturn, with growth falling to 2.2% from 14.3% last year. Mining and quarrying declined by 0.1%, compared to an 11.1% increase in the same time last year. On the other hand, the construction sector expanded by 7.7%, which was lower than the previous year’s 13.6% rise.
Other sectors had varied results as well. The electricity, gas, and water supply industry rose by 3.3%, down from 10.5% the previous year, while financial, real estate, and professional services expanded by 6.7%, up slightly from 6.2% the year before. Agriculture was a remarkable performer, with GVA increase of 3.5%, up from 1.7% the previous year.
Despite the overall dismal performance, Chief Economic Adviser V. Anantha Nageswaran emphasized the beneficial contributions of agriculture and construction. Aditi Nayar, ICRA’s Chief Economist, termed the growth as “tepid,” citing weaker-than-expected performance in manufacturing, mining, and services. This dramatic drop in growth has prompted concerns about attaining the fiscal growth target of 6.8% this year.
D.K. Srivastava, Chief Policy Advisor at EY India, ascribed the slowdown to weak industrial performance and a 15.4% drop in government investment during the first half of the fiscal year. He underlined that reduced investment spending, which is a key source of domestic demand, is affecting both the industrial and infrastructure sectors.
Looking ahead, high-frequency indicators indicate a mixed view for the second half of the fiscal year. While rural demand is projected to remain high due to healthy kharif production and the festive season, urban demand may encounter hurdles as credit growth slows, according to Dharmakirti Joshi, Chief Economist at Crisil.
FAQ
1. What is India’s GDP growth for the second quarter of 2024?
India’s GDP growth for Q2 2024 has slowed to 5.4%, which is the lowest in nearly two years. This marks a significant drop from the previous quarter’s 6.7% growth and is much lower than the 8.1% growth observed in Q2 2023.
2. Why has India’s GDP growth slowed in the second quarter?
The slowdown in GDP growth is primarily attributed to poor performance in manufacturing, mining, and weak consumer spending. However, agriculture and construction sectors showed growth, providing some positive indicators in an otherwise sluggish economy.
3. How does this impact the Reserve Bank of India (RBI) and its monetary policy?
The GDP slowdown has increased pressure on the RBI to consider rate cuts at its upcoming meeting in December 2024. However, the RBI is concerned about controlling inflation, which has already exceeded 6.2%, and insists that consumer inflation must fall to the targeted 4% before any rate reductions are made.
4. What is the government’s stance on rate cuts?
Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal have been vocal in supporting rate cuts, citing the need to stimulate growth amid the economic slowdown. They have consistently urged the RBI to consider reducing interest rates to boost the economy.
5. How does RBI Governor Shaktikanta Das view the rate cuts?
RBI Governor Shaktikanta Das opposes rate cuts, arguing that inflation must be brought down to the target level of 4% sustainably before any reduction in rates. His priority is to ensure long-term economic stability by controlling inflation.
6. What sectors showed growth despite the overall slowdown?
Despite the overall slowdown, agriculture and construction sectors performed well. Agriculture’s GVA growth accelerated to 3.5% from 1.7% a year ago, while construction expanded by 7.7%, although lower than last year’s 13.6% growth.
7. What are the concerns regarding India’s economic growth moving forward?
Experts are concerned that the significant slowdown could impact the country’s ability to meet the fiscal growth target of 6.8% for the year. Aditi Nayar, ICRA’s Chief Economist, has called the growth “tepid,” citing weaker-than-expected performance in key sectors.
8. Why is government investment seen as a major factor in the slowdown?
D.K. Srivastava, Chief Policy Advisor at EY India, attributed the slowdown to weak industrial performance and a 15.4% decline in government investment during the first half of the fiscal year. This drop in investment spending has impacted both industrial and infrastructure sectors, further contributing to slower growth.
9. What is the outlook for the second half of the fiscal year?
The outlook is mixed. Rural demand is expected to remain strong, buoyed by healthy kharif production and festive season consumption. However, urban demand could face challenges due to slowing credit growth, which may hinder economic recovery in the coming months.
