Editorial 1 : GDP numbers swing: Where does the key to sustaining growth lie?
Context
Clocking 6.5 per cent growth in 2024-25 amidst all the global uncertainties is creditable and encouraging.
Economic growth
- Growth in the fourth quarter surged to 7.4 per cent. Two quarters earlier, it had slowed to 5.6 per cent. But two quarters before that, it was at 8.4 per cent.
- It’s tempting to believe India saw a sharp and organic private sector slowdown and is now seeing a commensurately sharp recovery.
- Sharp swings in the intra-year fiscal impulse in an election year and the resurgence of agriculture due to a strong monsoon may be the reason.
- Indeed, the entire difference between softer GDP growth of 6 per cent in the first half and stronger growth in the second half of the year can be explained by these factors.
The factors
- First, government spending was heavily backloaded in an election year. Non-interest general government spending grew at just 2 per cent in the first half of the year but then surged to 15 per cent in the second half as the Centre and states rushed to meet budget targets.
- Second, subsidies were frontloaded, depressing net indirect taxes — and, with it, GDP growth — in the first half but then dramatically boosting both in the last quarter.
- Third, agricultural growth clocked less than 3 per cent in the first half but more than doubled to 6 per cent in the second half.
- Once you adjust for these “exogenous” factors, underlying growth is much more stable at about 6.5 per cent — which is where full-year GDP growth landed.
The uncertainty
- Heightened levels of global uncertainty are likely to persist for the foreseeable future, creating headwinds. Recent legal events in the US have only compounded the uncertainty.
- The impending uncertainty-induced global slowdown will inevitably put near-term pressure on exports across the globe, including India.
- India’s outlook over the next year therefore depends crucially on how domestic demand evolves and on how two crucial rotations in the domestic economy pan out — from investment to consumption and from urban to rural.
Investment- A way
- Investment has been key to India’s post-pandemic recovery, as the government’s capex push has been complemented by a real estate cycle.
- But the public investment impulse has peaked and there are signs that real estate may have also peaked.
- As both these pillars of investment provide less support, can the slack be shouldered by the third pillar: Corporate investment?
- While corporate India will undoubtedly benefit from lower interest rates and energy prices, it confronts three sources of external uncertainty.
- Given these multiple and overlapping sources of uncertainty, it’s unrealistic to expect a corporate investment surge this year.
Shift to consumption
- The implication is that the heavy lifting on growth will have to transition from investment to private consumption.
- Thus far, the urban economy has been consumption’s mainstay, reflected in strong four-wheeler sales, high-end services and premium products in recent years.
- But those impulses are unmistakably slowing as underlying supports — pandemic-era excess savings, formal-sector wages and unsecured lending — have faded.
- For consumption to sustain, urban slowing will have to be offset by rural firming. The signs are encouraging across MGNREGA, tractor sales and FMCG products.
- Consumption will have several catalysts this year: Softening inflation that boosts purchasing power, lower interest rates, income tax cuts and hopefully a strong monsoon.
Suggestions
- The trade deal with the UK sends a powerful signal of openness. Now, India must quickly try to conclude a US trade deal to reduce at least one source of external uncertainty.
- Simultaneously, it must hasten the EU trade deal. If these deals are expeditiously concluded, it would send an unmistakable signal of openness that increases India’s attractiveness as a “China+1” destination.
- Domestically, the focus must be on boosting monetary policy transmission, ensuring fiscal capex targets are hit and implementing the four labour codes so that labour-intensive sectors can exploit the trade-diversion opportunities from Southeast Asia, whose proximity to China will make US trade deals very challenging.
Conclusion
With public capex and urban consumption slowing, new growth drivers must emerge. Policy must support this shift and prepare for stronger growth to meet demographic needs. India's ability to thrive amid global challenges depends on this transition.